Q1 2020 Earnings Call

[music].

Greetings and welcome to the Heartland financial USA Inc. first quarter 2020 conference call. This afternoon partner distributed its first quarter press release, and hopefully you've had a chance to review the results, but there is anyone on this call who did not see the coffee you may access it artisans website H.T. Ella dotcom what does.

Great well management are then Cohen executive operating Chairman, Bruce Lee, President and CEO and Brian can.

Executive Vice President and Chief Financial Officer Management will provide a brief summary of the corner and then we'll 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 are forward looking statements as defined by should be Securities and Exchange Commission as part of these lines I must point out that any statements made during this presentation concerning the company's hopes beliefs expectations and predictions of future.

Our board and look forward looking statements and actual results could differ materially from those forget it.

Additional information on these factors included from time to time in the company's trenching and 10-Q filings, which may be obtained on the company's website or the Fccs website. At this time I will turn now I'll turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead Sir.

Thank you Josh good afternoon, and welcome to Arvin's first quarter 2020, <unk> earnings Conference call. We appreciate everyone. Joining us today as we discussed the company's performance for the first quarter of 2020.

Over the next few minutes I'll touch on the highlights for the quarter. I'll, then turn the call over to Heartlands, President and CEO, Bruce Lee will cover progress on business performance and our cold that 19 response, then Brian the keurig already VP and CFO will provide additional color around heart.

On the results.

Well 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 safety and health at risk.

Bruce will provide more detail on the many things we have done to support.

Protests 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 Cecil.

In a declining economic outlook, both of which led to significant build and credit loss reserves.

When you look at Q1 net income.

And related financial performance ratios on it tax affected 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, a 31.5 million.

Earnings per diluted common share were 54 cents compared to 91 cents.

However, net income available to common shareholders on a tax affected pre provision acquisition integration and restructuring cost basis was 38.1 million compared to Q1 2019 of 35.6 million.

Which resulted in earnings per diluted common share of a dollar in three cents for both Q1 2020 and 2019.

Return on average tangible common equity for the quarter was 8% and 14.46% on a tax affected pre provision acquisition integration and restructuring cost basis.

Well assets ended the quarter, a 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 have been well controlled with this quarter at 61.82% compared to 64.93% for Q1 2019.

Book value intangible book value this quarter, we're at $42.21 and $28.84 respectively.

An increase over Q1 2019 of six 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 aim bank.

Anticipated closing will be in the third quarter with aim bank, a 1.8 billion asset bank merged with an end to Heartlands Lubbock, Texas based subsidiary first Bank and trust.

This combination creates heartlands largest independent bank charter with 2.8 billion and assets.

The fifth largest bank headquartered in West, Texas, and the third largest deposit market share bank in Lubbock.

Also this transaction added six new Mexico branches with 250 million in assets to Heartlands, New Mexico charter, increasing new Mexico Bank and 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 cold that 19, our plans are to maintain our quarterly dividend as a result, I'm pleased to report that last week Heartlands Board of directors improved to 20 cents 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 in thrifts based on growth.

Credit quality efficiency and profitability.

Overall Heartland was right 40, it in the nation.

I'll now turn the call over to Bruce Lee Carbons, President CEO who'll provide an overview of the company's operating performance coal bed 19 response and credit Bruce.

Thank you Lynn good afternoon, everyone.

As we began 2020, we could not have imagined that we would be reporting first quarter result, as we are battling a worldwide pandemic.

During this challenging time, we've been focused on the health and wellbeing 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.

We are diverse geographic footprint reduces risk and contribute to our strong financial metrics that reflects our conservative liquidity profile healthy capital levels diverse loan portfolio in solid credit metrics.

Heartlands 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 the actions we have taken in response to the Covidien 19 pandemic and then I will turn the call over to Brian Mccaig, Heartlands, Chief Financial Officer, who will provide more details on the financials.

We had significant momentum coming out of the fourth quarter and I'm pleased to report, but in the first quarter, we continue to deliver deposit and loan growth.

We delivered $77 million and 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 and 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 opportunities zones.

[laughter] citywide banks in Denver, and Minnesota Bank and Trust also delivered impressive commercial loan growth.

Turning to deposits.

Customers saw its safe havens for market volatility.

We did not experience the seasonal deposit declines we have seen in the past.

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 and Trust and Arizona Bank and 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 point.

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 two basis points.

Turning to credit metrics I'm pleased to report that we continue to see stable credit quality in the first quarter.

Our nonperforming 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 nonperforming assets as a percentage 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 past 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 a $5 million were 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 company wide strategic initiative that streamlining our processes better aligned our people and invested in and implemented best in class technology customer compass.

In 29 team, we invested in technology across our customer service centers.

We implemented advance 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've 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.

[noise] online account openings grew 12% in 29 team.

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 double 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 plant 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 cancelled all employee and customer in person events.

We closed bank lobbies implemented drives wrongly indeed clean 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 30 Onest.

And if an employee needs time off because of illness to care for a sick family member or to provide childcare due to to school closings they'll be paid.

Covering 100% of any coated 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 were 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 card.

We are working individually with our commercial customers to help them address the financial challenges they're facing.

As of April 23rd we've made modifications to $513 million of loans, representing 7% of our commercial portfolio.

Well those modifications, 68% or 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 covert 19 affected customer segments geographic distribution loan size and underwriting standards.

[noise] today, the Cobot 19 pandemic is a health crisis across our country.

Hardships are being created for certain customer segments.

We 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.

[noise] Congress passed the cares Act on Friday March 27.

Just one week later on Friday April 3rd our banks were among the first in the country to begin taking requests for the newly created SP, a paycheck protection program [noise].

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 3000 applications and funded over $1 billion in loans.

The 1800 employees across Heartland and our member banks are proud to have served our small businesses and help preserve over 100000 jobs.

We are actively participating in the second wave of the program that opened today.

We also recognized 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 nonprofit organizations across the states, where we live and work.

We are donating funds work innovations that are working directly with those affected by cobot 19.

We need to work together to address the impacts of this pandemic.

We also need to work together to safely reopened our communities and our economy.

Hurtling diverse geographic footprint, we will allow us to reopened 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 Brian Mccaig for more detail on our quarterly financial results.

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 $54 per cent per share this quarter.

This includes a 21 and a half million dollars Cecil provision for credit losses, and for $1.4 million of acquisition and integration costs.

Excluding these two items our earnings per share was one dollar and three cents.

For the quarter other significant noncore items consisted of a mortgage loan servicing right valuation write down of 1.6 million and 400000 of incremental co bid 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, an income statement I'm going to cover Cecil right upfront.

The initial day, one Cecil adoption impact resulted in a 12.1 million dollar increase and the allowance for funded loans and a 13.6 million dollar increase and the allowance for unfunded loan commitments for a total of 25.7 million Ray 37.

Percent increase to our existing credit loss reserves.

Which after tax also resulted in a 10 basis point decline in our tangible common equity Michelle this.

This was right in line with the range, we discussed on our last call and as disclosed in our recent 10-K.

Our first Cecil 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 cobot 19 pandemic [noise].

In total the day, one adjustment and quarterly provision.

Net of $5 million and 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.

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 were 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 covert 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.

[noise], we utilize the March 27th consensus macroeconomic baseline forecast for Moody's as are most likely economic scenario.

As the economic outlook evolves and our pandemic related loss profiles and experienced develops we will adjust our allowance for credit losses and provisioning accordingly.

[noise], Okay now, let's move onto 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 the 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 Cecil day, one adjustment, which reduced the ratio by 10 basis points and an 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 five basis points to 8.57%.

[noise] 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 30, Onest, Our banking network had approximately 2.5 billion of unused borrowing capacity.

So we believe that heartlands balance sheet with strong capital in loss reserves combined with ample liquidity and low leverage provide sufficient strengths 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 were $234000 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.

Percent range, we indicated last quarter.

The decline of six basis points from last quarter included a 16 basis point decline in loan yields due to lower purchase accounting accretion and the feds rate cuts during the quarter.

The lower Yong 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 nine 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 two basis points over last quarter.

Noninterest 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 450000 or 7% from last quarter.

Okay and on the sale of loans was up 1.3 million on higher loan refinance activity.

We also recorded a 1.6 million dollar write down on loan servicing rights, reflecting faster mortgage prepayment speeds.

Moving to noninterest expense total noninterest 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 500000 last quarter.

So on a core run rate basis, our costs that exclude acquisition integration 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 dollar increase.

This is due to the resumption of our FDIC insurance accruals.

And an increase cost for equipment required to provide work from home capabilities due to the cold at 19.

Pandemics.

[noise] more specifically salary and benefits were flat compared to last quarter as salary costs declined on fewer fts, but were offset by increases in some benefit costs and mortgage related commissions.

[noise] occupancy furniture and fixture expenses combined rose 500000, primarily due to the increase increased costs for coal that 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 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.

Thank you Brian.

Before I resume my comments I need to clean up in the air 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 in 61 million so before.

Brian fill out of his chair I wanted to make that I think that correction.

You know banding together, we will survive this pandemic.

Across Hartland, 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, we have the financial strength to weather the storm.

With 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.

Thank you.

I'll be conducting acuity question answer session.

As a reminder to ask a question on each press star one on your telephone to withdraw your question press the pound keep please standby we've compiled jernej roster.

Our first question comes from Jeff Rulis with D.A. Davidson you May proceed with your question.

Thanks, Good afternoon.

Yeah, Hi, Jeff Jeff.

[noise] on the on the capital again could you remind us what or an updated number on pro forma Tc should the aim close in Q3.

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 her Jeff I got it here I think I've got yeah, I think it didnt, maybe just broadly speaking if you talk about if there if there is some impact there just general comfortability levels I think.

But you talked about the maintain maintaining the dividend is the plan and just kind of where the comfort levels are should that be.

Whereas that flushes out even post deal. Thanks, Yeah I think.

I'm looking here, but I believe that where we thought.

Thought we'd be would be about 8.4%.

Projected.

And I think that was maybe getting through the end of the year. So I think that had a little bit earnings added with 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. So we were going to lose from Cecil that was already in.

Yeah, and and so then we'll have to see what happens with coal bid and how we go forward but.

That's so we thought Haim I think was going to keep us relatively flat.

On our metrics. After you took down the 10 basis points that we knew about four.

[noise] for seasonal.

Got it okay.

And then.

Thanks to the detail on on your current exposure I think could you speak to what aim has got audits books in terms of a similar level of.

Cross section of the loan portfolio I guess at risk.

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 West, Texas, We think that it's going to be.

Now they are affected will be much greater.

What I saw was Midland was number one in Odessa was number eight in communities affected by.

Covidien related.

Industries with both of them over 40%. So we haven't taken the deep dive footwear, but what we have seen in the.

Markets that they're operating in or virally infected by Covis 19.

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.

Makes me think that wasn't kobin related but could you clarify kind of the the.

What drove that.

Charge off there.

Yes that charge off was definitely not co bid related we did it came to us through one of our acquisitions and it was fully reserved and so we've been dealing with it for multiple quarters.

Jeff Okay. Okay.

All right I'll step back thanks.

Thanks.

Your next question comes from Andrew lunch with type of Sandler you May proceed with your question.

Hey, guys good afternoon.

I am honored.

I know, it's tough to give.

Too much guidance this point right.

It seems like just on the extent 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 go back for recognizing that could be some one time Tobin we've been from there.

Yeah, I think I think generally we would be aiming to keep it flat and probably without kobin, we'd probably be working to get it down but that may be a little more difficult.

We will have you just just for some bumps that maybe you won't think don't think about we do have a our merit increases, which we will now be giving employees here in April have already begun.

And then I think it really comes down to the co bid and the credit related costs that will have to.

Incur how much those are we weren't sure I think the rest of that and I think we are 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 you know, we announced that we did the $1.2 million of contributions.

We are working on ways for example, maybe cutting back on some some traditional marketing spend that maybe we can do differently in some travel unrelated it's going to be lower just because people aren't so there's lots of ins and outs that are moving yeah, Andrew what I might is that we would have.

Without Kobin, we would have continued on a downward trajectory as we continue to 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 co good related expenses and as the credit environment worsen.

We think that we'll have our collection expense could possibly go up.

So.

So little early for us to kind of give any guidance around co bid or or collection expenses, but I think in general you can expect to see sort of flat to downward trends pre that.

Through.

That's helpful and then related to the PTP funds and I'd say, what's going to accrete through the margin do you guys have an estimate of like with the fees are going to reflecting off.

Yes, the first slug in I can extrapolate though.

Second Uh huh.

Yes, so we did about $1 billion of funded loans and I think.

We think that the numbers going to be about 2.8% of those maybe 2.9.

So it's I think 29 ish million dollars.

If I actually started to get just a little bit of that cash in how it's going to Hep C. The piano, Andrew I haven't got all figured out I think given 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.

On 29 ish million.

Yeah, Andrew I might I might just mention how today where.

After the SPJ opened up TPP and clearly we had been working with our.

With our small business customers to get them ready to enter into the portal and we had about 1000 people cued up.

And we actually entered less than 30.

Because the portal was down it was really a disastrous reopening.

Today.

Okay, all right, that's a but that's helpful but.

Oh, hi concerning your probably government.

So I guess, excluding how this might flow through the margin Dan.

Margin trends still downward I know, there's room on the funding side to try to.

Reduced rates in the another floors, there, but as the trends still still negative.

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 things be slow you know you might see you might even CSB flat to just down a little bit next quarter. I think we've got a couple of things yet we can pull but not much and in the deposit side. We're working on a very last pieces of that right now.

And then it'll be a slow grind of you know.

Probably if we're at 375 now we might act deer at.

Down maybe eight to 10 basis points from there if things just Brian down.

Okay.

That purchase all helpful and I will 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, what we might roll over loans, how quickly those are going to come and pay down. So I think thats 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.

Okay.

Thanks.

Okay.

Thank you. Our next question comes from Terry Mcevoy with Stephens You May proceed with your question.

Thanks, Good afternoon.

Hi territory Hi.

Brian didn't fall off as chair when you saw that the first quarter loan loss provision that 21, and a half million I guess my question is I mean, the economy has unfortunately deteriorated since the end of March.

If things remain unchanged as it sound like Brian that that he CL to total loan ratio would continue to move higher under that scenario.

Yeah, I would say well I just don't know how much you know lots things will change, we we focused on getting where we need to be at the end of the quarter.

As I 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, Sundays, yet before the end of the quarter. So we'll see how.

Return 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.

Thanks, and then and thanks for the loan exposure in modification data I guess when you look at the industry's at risk.

What what specific industries, which highlight or are you experienced in the high amount highest amount of modification requests and could you maybe share some.

Modification data within those industries.

Yeah carry 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 modification.

But I'm sure you probably didnt have time to look at the slides in detail for example that lodging portfolio has had $60.4 million of loan modifications through April 20 Threerd.

And I and Terry on a relative basis, if on page. It's page three of the document Theres a second section.

Restaurants and bars, even though it's it's about the same dollar amount. It's 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 realistic resin retail real estate or in the teens percentage. So.

Hi, Yes, yes. Thank my tiny screen did not go all the way to the right. So thanks, thanks for pointing that out and then from I guess, just the maybe last question. It really sounds like the operation customer come to cut compass really paid off over the last 45 days.

Last year, you were targeting was a $10 million the 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.

I would say that that we absolutely are we actually over achieved 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 theres, a whole nother opportunity for us to make improvements on because of what we've seen over the last 45 days and our ability to re allocate our people change our processes and deploy new technology that enable us.

To respond the way we have in the last 45 days. So I think I'm not quite I don't think were 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 and as you can expect the revenue lift is hard to find and amongst everything else it's going on.

But I would say if you look at our fts.

Those have dropped a you know another.

You know 80, almost 90, I guess people this quarter.

A lot of that is related to and a lot of the prior quarters drop was also related to a customer comps initiative. So as we found efficiencies and we havent replace turnover and various other things and have utilized the capacity.

As we brought in.

Thank you for the valley in and a rock for Bank and trust in the last half of the year. So it really feels like we're getting good traction on the efficiency side, and I think were and better position with the tools. We've put in on that revenue side as well 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 [noise].

Modification, well not modifications, but what we've done waiving fees on the consumer side in 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 waving of those fees because of cobot.

Great. Thank you both.

Thanks Terry.

Thank you and as a reminder to ask a question I need to press Star. One is on our next question comes from Damon Delmonte KBW. Sir you May proceed with your question.

Hey, good afternoon, everyone hope everybody is doing well during these challenging times, what do you I asked my questions have been asked and answered and thanks for the a great detail in the in the slide presentation, but I'm just wondering.

Are there any concerns with the with with depending deal with aim and that it could not close are there any types of triggers in the merger agreement that that could result in the deal not happening.

Yes, David we have a double trigger.

We busted through the first trigger which as it were down 15% from the original price meeting our stock prices down 15% or more that's the first trigger a so we busted through that obviously, you'll look at where we cut the deal where the stock prices at 30 Bucks or 31 books now, but the said.

I can trigger is that we would have to be down 15% more and 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 positively that aim looking forward to being part of heartland. So.

I really don't see any issues that could kill that deal and you know 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's direct lending in.

Oil and gas, but as the related support systems hotels, motels multifamily restaurants bars, so forth and so on that will clearly be impacted with oil slowing down so.

I don't see any problems with the Damon we should be in good shape.

Okay, Great and then with regards to mortgage banking pretty decent quarter. This past quarter, how did the pipelines look kind of going into here in the second quarter and could we expect.

Lisa a similar level, if not higher and what we saw this quarter.

Yeah, I would say the pipelines going into the quarter look good.

And I think you know refinancing activity and other activity is good at the moment.

And then in the environment looking much pass the next couple of months and whats in the pipeline is not easy endeavor. 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 JP Morgan others were pulled back from the end as you know the industry we have.

Went on that but.

It does make you wonder how the mortgage industry will do going forward and we'd be part of that industry. So.

And David as you know most of our mortgage operation today is being originated out of Texas, and primarily Lubbock and as Rich mentioned love. It has been very very strong.

And 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, what that's going to look like.

Got it Okay and then just lastly, Brian you know just to kind of follow up on your comment about being a challenge to the model out.

Accretable yield going forward just given numerous moving parts on you would you said this quarters two point.

75 million or or nine basis points impact would you say that that was kind of what you're expecting or would you say that you might see it pick up little bit higher like you had been in the past.

I would say before the pandemic, yet I would say that would have been a little bit lower than we would have expected.

Whether that will continue or not you know the.

The pace of refinancing that refinancing, but getting at deals to re underwrite them at their normal time that they renew is what I'm just not sure about without with the modifications that we've done some of those might get delayed for 60 to 90 days.

And so you know that could just push out when we bring in the income versus what we normally one thing I think it was a little bit lower than we would have budgeted or thought going into the quarter well I think when Brian provided kind of guidance last quarter. We certainly didn't anticipate the fed action right you know the.

The emergency rate cuts so while we anticipated a little better I think were actually pretty pleased at how we were able to respond and we were ready on both the deposit side and in our floors kicked in.

Okay, and can you remind us what percentage of your 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 a big moving and rates by the fed.

Yeah. So the way I, usually explain this is of our commercial loans about 50%, our variable or what I would call semi variable.

Another almost 55% to 60% have floors or about $2 million round numbers of those $2 million, 75% or.

I'm, sorry billion not million right.

Right now I'm doing [laughter] here like I was doing right [laughter].

Billion [laughter] either billion. So 2 billion have floors 1.5, or 75% are in the money are already out there floor. So we've dropped below or at the floor.

So we haven't we have a few where we put lower floors and just to guard against should we ever.

Negotiate with customers is make sure we had at least something that wouldn't go negative should we ever unfortunately get into a negative.

Great environment. So we have a few of those but the bulk or the floors and kick them.

Got it okay. That's very helpful. Oh, that's what I had thank you everyone.

Thanks, David Thanks, Dan.

<unk>.

Thank you.

No further questions at this time I would like to turn the floor back over to Mr. fluent for any closing closing remarks.

Thanks, Josh in closing, we're pleased with the financial performance for the first quarter as a cobot 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 in communities.

Marlins 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 Weve 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 whats yet to come.

And last I want to remind our stockholders and analysts that are 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 attended the annual meeting, which will be held on Wednesday may Twentyth 2020 at one P.M. 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 HP left dot com, you'll find more information for that meeting like thank everyone for joining us today and hope you can join US again for our next quarterly conference call in late July 2000.

And 20.

So good evening and please stay safe and healthy good night.

[noise]. Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

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