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Heartland Financial USA Inc (HTLF) Q4 2020 Earnings Call Transcript

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Heartland Financial USA Inc (NASDAQ: HTLF)
Q4 2020 Earnings Call
Jan 25, 2021, 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. Fourth Quarter 2020 Conference Call. This afternoon, Heartland distributed its fourth quarter press release and hopefully you have had a chance to review the results. If there is anyone on this call who did not receive a copy, you may access it a 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 the 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. Additional 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 would now turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead, sir.

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Lynn B. Fuller -- Executive Operating Chairman

Thank you, Valerie and good afternoon. Welcome to Heartland's fourth quarter 2020 earnings conference call. We appreciate everyone joining us today as we discuss the company's performance for the fourth quarter of 2020 and for the full year. 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 business performance and our COVID-19 response. Then, Bryan McKeag, our EVP and CFO, will provide additional color around Heartland's results. Also joining us today is Nathan Jones, EVP and Chief Credit Officer who will be available to answer questions regarding credit. Bruce Lee and Bryan McKeag will share with you the many things we are doing to support, protect, and care for our employees, customers, shareholders, and communities.

So now on to the financial highlights for 2020 and the fourth quarter. Well, I'm very pleased to report that based on all the challenges of 2020, the continued low interest rates, state shutdowns, and the overall impact of the pandemic, we still had a very good year. Fourth quarter net income available to common shareholders was $37.8 million or $0.98 per diluted common share. Net income before our preferred dividend was $39.8 million, a 5% increase over 12/31/2019. For the full year 2020, net income available to common shareholders was $133.5 million and earnings per diluted common share was $3.57. Annualized return on average tangible common equity was 12.77% and the annualized return on average assets was 0.92%. Our tangible common equity ratio ended the quarter at 7.81% as a result of the two acquisitions totaling $2.3 billion in assets. Bryan McKeag will provide more detail on our capital ratios.

The net interest margin on a fully tax equivalent basis at 3.55% for the quarter was unchanged from the prior quarter and Bruce and Bryan will share more detail in their comments on margin. Book value and tangible book value per common share continued to increase ending the year at $46.77 and $32.07 respectively. Now that's a 9% increase over 12/30/2019. Also during the fourth quarter, $12 million of the $17 million in loan loss provisioning was tied to our $2.3 billion of acquired assets and Bryan McKeag will expand more on our provision for the quarter. Well, with respect to the balance sheet, assets reached a new record high at $17.9 billion and we achieved growth across all categories for the year. Assets were up $4.7 billion, net loans were up $1.7 billion, investments were up $2.9 billion, non-deposit maturities, which we're focused on, up $3.9 billion, and equity was up $501 million and our efficiency ratio at 56.65% was down 9% for the year.

Moving on to M&A, as we discussed last quarter, we closed on our largest acquisition ever, the AimBank transaction in West Texas. AimBank merged with and into Heartland's Lubbock, Texas-based subsidiary. With this acquisition, First Bank & Trust is now Heartland's largest bank with over $3 billion in assets. The systems conversion is set for mid-February. In 2021, we are forecasting approximately $34 million in after-tax income from Aim which includes two-thirds of our $12 million in after-tax cost saves. This transaction is approximately 10% accretive to EPS.

Also in early December, our Arizona Bank & Trust Bank in Phoenix, Arizona completed its purchase and assumption of the four Johnson Bank, Phoenix branches. Our simultaneous close and first-time ever virtual conversion went extremely well, adding approximately $416 million in deposits, $151 million in loans, and $235 million in assets under management to Arizona Bank & Trust's trust department. This transaction took Arizona Bank & Trust's total assets to over $1.5 billion and in 2021, we're forecasting approximately $6.5 million in after-tax income from these branches. This transaction is approximately 5% accretive to EPS.

Well, per our M&A strategy, we continue to prioritize both in-market and larger acquisitions. Acquisitions contribute to a number of companywide goals. In-market acquisitions provide greater cost saves and cost take-outs and synergies and create greater market dominance for our member banks. Currently, Heartland member banks have achieved Top 10 deposit market share in 26 of our 38 MSAs and Top 5 deposit market share in 12 of our 38 MSAs. Acquisitions have significantly increased our asset size and earnings base.

The increased asset size from accretive acquisitions combined with Operation Customer Compass's more efficient and scalable operating platform significantly contributed to the lowering of our efficiency ratio. As I've said in the past, our priority has been to expand in our current footprint and work toward our goal of $1 billion in assets in each state where we operate. Currently, 10 of our 11 banks have assets exceeding $1 billion and we continue to have a deep pipeline of attractive prospects with a number of active opportunities.

Now for the 10% increase in our quarterly common dividend. At this month's meeting, Heartland's Board of Directors approved a $0.22 per common share dividend payable February 26th, 2021 to shareholders of record on February 12th, 2021. Through many recessions, including the Great Recession and now the pandemic, we've had 40 consecutive years of increased or level quarterly dividends, a record beyond many of our peers. The Board also approved our preferred dividend of $175 payable on April 15th, 2021 to preferred shareholders of record on March 31, 2021.

Now before I transition comments over to Bruce, I want to highlight a recent addition to the Heartland Board. Christopher S. Hylen will serve as an Independent Director on the Heartland Board of Directors. With more than 25 years of technology and business leadership experience, Chris is a high-caliber executive who brings a special depth of knowledge and perspective to the Heartland Board. We will benefit from his executive level leadership, his vast experience in using technology to enable extraordinary client experiences and his laser focus on delivering value to clients and shareholders. 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. As I look at the strong results from our fourth quarter and the year as a whole, I'm once again reminded how proud I am of the teams across Heartland in each of our member banks. We have demonstrated our commitment to serving our customers and communities while prioritizing the health and safety of our employees. It's their strength and resiliency that allowed us to endure challenges and positioned us for growth in 2021 and beyond.

I have said throughout the pandemic that Heartland would emerge stronger than before and we're doing just that. We continue to drive down costs through disciplined execution of strategic initiatives, improved processes, and by leveraging scale. We completed two acquisitions that further diversified our assets and increased our presence in important growth markets of Phoenix and West Texas. With these two acquisitions, over 60% of Heartland's assets are now in the West and Southwest regions where we see the greatest economic growth in the U.S. With our strategic focus on growth, expense discipline, geographic footprint, and proven M&A track record, we are uniquely positioned to prosper in a rapidly evolving and consolidating financial services space.

In the fourth quarter, Heartland's total assets grew to $17.9 billion, an increase of $2.3 billion in the quarter primarily from acquisitions. Assets grew $4.7 billion or 36% for the year. Efficiency ratio for the quarter was 54.93%, our lowest ever for the fourth quarter and 538 basis points lower than a year ago. For the year, efficiency ratio was 56.65%, 585 basis points lower than 2019 and exceeding our own high expectations. Our ability to drive efficiency while strategically investing for growth and enriching the customer experience continues to differentiate us. We delivered another strong quarter of deposit growth organically and through acquisitions. Total deposits ended the quarter just below $15 billion, an increase of $2.2 billion from the linked quarter. This includes $2.1 billion of deposits acquired at fair value in the AimBank and Johnson Bank branch transactions.

Excluding these acquired deposits, total deposits increased $127 million from the linked quarter and $1.8 billion or 17% for the year. Non-time deposits totaled $13.7 billion, an increase of $1.9 billion or 17% during the quarter. Excluding acquisitions, non-time deposits increased $191 million or 2% from the linked quarter. For the year, non-time deposits increased $3.9 billion or 39%. Excluding acquisitions, non-time deposits increased $2.1 billion or 21%. Our deposit mix remains enviable with 38% in non-interest bearing accounts and 92% in non-time account balances. Our disciplined deposit pricing has reduced total deposit cost to 14 basis points for the quarter, down 47 basis points from 61 basis points in the fourth quarter of last year.

Turning to credit metrics, I am pleased to report that we continue to see stable credit quality. Non-performing loans represented 88 basis points of total loans at the end of the quarter, a slight decrease from 89 basis points in the linked quarter. Non-performing assets as a percentage of total assets also decreased to 53 basis points from 55 basis points in the linked quarter. Other real estate increased to $6.6 million from $5.1 million in the linked quarter primarily due to assets acquired in the AimBank acquisition.

Our delinquency ratio remains below the most recent five-year average despite an increase of 6 basis points from the linked quarter to 23 basis points. Non-pass rated loans increased from 8.7% in the third quarter to 10.8% in the fourth quarter, a combination of acquired non-pass loans and some downgrades in the legacy portfolio. The ratio remains at relatively low level. Sub-standard loans decreased to 44% of total non-pass loans compared to 47% for the previous quarter.

Lastly, net loan charge-offs for the quarter were $216,000 or 1 basis point compared to $21.3 million or 92 basis points in the linked quarter. We believe that the two previous charge-offs from large commercial borrowers in the third quarter were an exception and these metrics reinforced that. We continue to work closely with our customers and if necessary, we'll take proactive steps to help them stabilize their positions. We are pleased with the overall credit portfolio, remain cautiously optimistic in 2021 based on how our portfolios performed in 2020, and are encouraged by the prospect for an additional round of government stimulus, and the continued roll out of COVID vaccines.

Turning to commercial, excluding PPP related loans, organic growth was up slightly from the linked quarter. We saw fourth quarter organic loan growth in owner-occupied real estate of $99 million, non-owner occupied of $43 million, and commercial and industrial of $44 million, creating strong momentum for 2021. Construction declined $155 million largely due to shifts to owner-occupied and non-owner occupied real estate. Including acquisitions, our commercial loan portfolio increased by 8% for the year and 14% from the linked quarter. Our remaining portfolios, including acquisitions, agriculture increased $206 million, residential mortgage increased $139 million, and consumer loans increased $29 million for the linked quarter.

Heartland is proud to have helped nearly 5,000 small businesses obtain loans during the first draw of PPP, helping provide a critical lifeline in our communities. Six member banks were Top 10 PPP lenders in their respective markets and we are actively participating in the second draw that opened to our banks on January 19th. We've already received more than 1,200 second draw applications as of today. In the PPP first draw, we only accepted applications from current customers. Based on our successful execution in the first round, we're extending our reach for the new program. In addition to current customers, we will offer PPP loans to high priority prospective clients in minority owned and underserved commercial prospects, providing an opportunity to build new relationships, demonstrate our capabilities, and serve our communities.

In the third quarter, the SBA began to process PPP forgiveness applications. As of mid-January, more than half of our borrowers had submitted forgiveness applications representing $688 million of our $1.2 billion in PPP loans, excluding acquisitions. About 1,500 loans have already been forgiven and funded by the SBA. Investments we've made in Customer Compass, our multi-year strategic initiative have enabled commercial teams at each of our banks to process applications efficiently and faster using our best-in-class sales force CRM and Encino platforms. Overall, we've seen a 30% decrease in the time from loan application to funding, improving speed to market and the customer experience.

In December, we closed the AimBank acquisition, making First Bank & Trust, Heartland's largest bank with more than $3 billion in assets and the fifth largest bank in the thriving West Texas market. We're scheduled to complete system conversion in February. Also in December, Arizona Bank & Trust completed its acquisition of Johnson Bank's four banking centers in the Phoenix market. The close and simultaneous conversion raised Arizona Bank & Trust's assets to $1.5 billion, enhancing its already strong foundation.

I am thrilled to welcome AimBank employees to First Bank & Trust, Johnson Bank employees to Arizona Bank & Trust and both teams to Heartland. These strategic acquisitions in growth markets have provided scale, added talent, and created the opportunity to bring new products and services to existing AimBank and Johnson Bank customers. We will also consolidate three AimBank branches based on proximity to existing branches in their respective markets.

Consumer behaviors have changed and through early investments in Operation Customer Compass, we can provide customers the in-person and digital options they want to interact with us. In-branch transactions have decreased 35% from pre-COVID levels. We've seen a steady rise in the use of our mobile and online banking platforms, increasing 16%. We installed more than 100 new ATMs in the second half of the year. Small business customers have appreciated the enhanced deposit capabilities and overall, ATM deposits have increased 35% from the previous quarter.

Given this ongoing shift to digital, we continue to rationalize our branch footprint to more efficiently serve our customers. We consolidated three branches in 2020 and will consolidate five more this month plus three AimBank branches. An additional 10% of our branches are under review. We continue to operate under our pandemic management plan with employee and customer health as our top priority. Our banks are open for business and we're providing our customers with a high level of service they value from our banks.

Employees who can work from home do so while those who come into bank locations and offices are on rotating teams to limit potential exposure. Heartland's diverse geographic footprint continues to be a strength during the pandemic. Our banking centers are serving our customers in lobbies, drive throughs and by appointment. We'll continue to adapt to local condition and are confident in our ability to operate in this environment as long as needed.

2020 was a year when many in our communities were in need and Heartland provided $1.5 million of financial support. In April, we contributed $1.2 million to organizations responding to challenges created by COVID-19. In October, we donated more than $260,000 to high need schools in our markets providing teachers money to purchase technology, supplies, and materials to help students learn in a safe and healthy environment. These dollars and our employees' volunteer hours made a meaningful difference and enriched lives in our communities.

Lessons learned in 2020 will serve us, our customers, and our communities well. The strategic investments we began making in 2019 allowed us to pivot, act quickly, and meet the challenges of the past year. We established new ways to collaborate and connect with each other and our customers. We deepened existing relationships, established new ones, and remained focused on the customer experience. We lowered our costs, delivered new digital capabilities, improved our speed to market, and continued to invest for the future. We are optimistic and well positioned for growth in 2021. We are open and ready to serve our customers and communities as they emerge from the pandemic. Now I will turn the call over to Bryan McKeag, Heartland's Chief Financial Officer for more details on our performance and financials.

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

Thanks, Bruce and good afternoon. I'll begin today with an overview of earnings per share, which was reported at $0.98 this quarter. This quarter includes three significant items. First, a provision for credit losses of $11.9 million was recorded for purchased non-credit deteriorated, commonly called non-PCD loans and unfunded loan commitments acquired in the AimBank & Johnson branch transactions. Second, acquisition and integration cost of $2.2 million were incurred related to these acquisitions. And third, we recorded $4.6 million of additional fee income in conjunction with the forgiveness of approximately 20% of our PPP loan balances during the quarter. Excluding these items, Heartland's earnings per share would have been $0.20 higher or $1.18. So again this quarter, core earnings were strong.

Before I go into my detailed comments, I want to remind you that our updated fourth quarter investor presentation is available on the IR website -- the IR section of our website. So I'll start my comments with the provision for credit losses, which totaled $17.1 million this quarter and includes the previously mentioned $11.9 million provision on non-PCD loans and unfunded commitments in our two acquisitions. The remaining $5.2 million of provision related to legacy banks and reflects the following components.

First, legacy loan balances excluding PPP in total declined $91 million and unfunded commitments declined $65 million in the fourth quarter. Second, we continued to have some legacy loan downgrades and had a small increase in reserves for non-accrual loans. Third, consensus economic forecasts continued to show modest improvement. However, the economic outlook factors and components used to develop the allowance were not changed as it is Heartland's assessment that a significant level of economic uncertainty remained at year-end. And lastly, net charge-offs were minimal this quarter $216,000.

Heartland also booked a $12.3 million increase directly to the allowance for loan losses for the purchase of credit deteriorated or again referred to as PCD loans in our two acquisitions. In total, all the items I just mentioned resulted in a reserve build of $29.2 million a quarter that was primarily related to acquired loans. So at quarter-end, the allowance for credit losses on loans was $131.6 million or 1.31% of the loans and the allowance for credit losses on unfunded loan commitments was $15.3 million or 16 basis points of total loans. Together, these two allowances result in a total allowance for lending related credit losses of $146.9 million or 1.47% [Phonetic] of total loans. When the PPP loan balances are excluded, the total allowance for lending related credit losses stands at 1.62% of loans. In addition, at year-end, we had unamortized purchase loan valuations on our balance sheet totaling $33.2 million or 37 basis points of total loans, excluding PPP.

Moving to the rest of the balance sheet. Investments grew $1.2 billion this quarter primarily due to acquisitions and now comprise 35% of assets with a tax equivalent yield of 2.38%, a duration of just under six years and generate $65 million of average monthly cash flow. Borrowings decreased $206 million to end the quarter at $625 million or 3.5% of assets. At year-end, our banking network had approximately $4.1 billion of unused borrowing capacity. The tangible common equity ratio declined 22 basis points to 7.81% at year end. Excluding the 57 basis points decline from our two acquisitions, the ratio would have increased 35 basis points and remained well over 8%. Heartland's regulatory capital ratios also remained strong with common equity Tier 1 at just over 10.9% and total risk based at just over 14.7%. So Heartland's growing balance sheet continues to be strong and well positioned.

Moving to the income statement, net interest income totaled $132.6 million in the quarter or $10.1 million higher than the prior quarter. The net interest margin on a tax equivalent basis this quarter was 3.55% or flat compared to last quarter as a 16 basis points decline in investment yield was offset by a 20 basis points increase in loan yield and a 4 basis point drop in net interest costs. The increase in loan yield was driven by the recognition of an additional $4.6 million of fees on PPP loan forgiveness as I previously mentioned. This quarter, the net interest margin includes 10 basis points of purchase accounting accretion, which was unchanged from the prior quarter. In addition, we exited the year with approximately $19.3 million of unamortized PPP loan fees remaining on our books.

Net interest income totaled $32.6 million for the quarter, up $1.4 million from last quarter as the gain on sale of loans declined $1.8 million on lower seasonal mortgage loan activity while total security gains increased $1.5 million compared to last quarter. In addition, service charges were $1 million higher this quarter primarily reflecting one month of run rate from our new acquisitions. Shifting to non-interest expense, non-interest expenses remained well managed totaling $99.3 million this quarter, up $8.9 million largely due to our new acquisitions. When excluding acquisition, integration, restructuring, and tax credit loss and asset losses, Heartland's core expenses increased $6 million to $92.6 million incurred $6.6 million last quarter. This increase primarily reflects one month of run rate costs from our new acquisitions.

The one specific expense line item I would mention in losses on assets, which totaled $2.6 million this quarter and primarily relate to writedowns on several branches as part of Heartland's ongoing branch optimization program. As this program continues to progress, we may have additional branch writedowns over the next several quarters. So as we exit 2020 and look ahead to 2021, we believe Heartland is well positioned to deliver strong results next year and would provide the following comments starting 2021.

First, loan growth rate ex PPP is expected to be in the mid-single digits with lower first half growth and then more robust growth in the back half. A modest deposit growth rate in the low-single digits is expected with higher first half growth from government stimulus and then some run-off in the second half. The remaining round of PPP forgiveness will happen largely in the first half of 2021.

The new round of PPP is yet to be determined. However, we're off to a good start as Bruce mentioned. The NIM ex PPP will have some modest pressure. However, with higher fee income continuing on PPP forgiveness in the first half and higher purchase accounting accretion, net interest margin is projected to be slightly under the current all-in TE [Phonetic] rate, tax adjusted rate that is to be in the 3.5% range for next year.

Provision for credit losses are not expected to exceed $35 million assuming a firming economy in the second half of 2021. Mortgage banking income is expected to decline by 15% year-over-year. Deposits and service fees are expected to increase over 20% next year due to recent acquisitions and a recovery from a poor first half in 2020. Wealth and brokerage fees are expected to show mid-single digit percentage growth. Core expenses are expected to increase $104 million to $105 million next quarter reflecting a full quarter of our new acquisitions and then conversion and all cost saves realized will fall -- in the second quarter will fall to the $102 million to $103 million range and then settle into the $101 million range thereafter.

On a full-year basis, we expect the efficiency ratio to be in the 56% to 57% range. AimBank integration and conversion costs are expected to be $2.0 million to $2.5 million in Q1 2021 and we believe a 22% tax rate is a reasonable full year run rate assuming no tax law changes from the new administration in D.C. Lastly, we expect our TCE ratio to climb back above 8% as we get about 20 basis points to 30 basis points of increase per quarter. However, the new round of PPP loans many weigh on the ratio during the first half of 2021. With that, I'll turn the call back over to Bruce.

Bruce K. Lee -- President and Chief Executive Officer

Thank you, Bryan. Valerie, let's open up the lines for questions now.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Jeff Rulis of Derico [Phonetic].

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

Thanks, good afternoon.

Bruce K. Lee -- President and Chief Executive Officer

Hi, Jeff.

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

Hi, Jeff.

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

A question on the -- just on the non-accrual, well, the NPAs in general, if you could just kind of break out what the increase in non-accrual and OREO linked quarter, what was legacy, what was acquired?

Bruce K. Lee -- President and Chief Executive Officer

Nathan, you want to answer that first and then Bryan maybe follow-up?

Nathan Jones -- Executive Vice President, Chief Credit Officer

Yeah, absolutely. Largely look at the non-accruals, it was actually if you look at it from an NPL standpoint, we actually had a reduction from a legacy Heartland perspective of almost $4.5 million. So when you actually take them together, what we really saw was the overall increase that you're seeing today, which is a little bit closer to just north of 7 [Phonetic]. So really is a positive story overall as we continue to work with our customers especially given some of the headwinds they are all facing today. As Bruce said, we're very optimistic or cautiously optimistic about the credit performance, continue to remain so as we look forward. Bryan, would you like to add some additional clarity on to some of those numbers as well?

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

No, I think you got them pretty close. I would just say there is a table on Page, at least, 17 on my print out of our press release tables that can help you out, Jeff, but basically it shows that our non-performers went up about $9 million and we acquired almost $13 million in our acquisitions. So that's where Nathan was saying, had we not had the acquisition, our non-performers would've actually gone down.

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

Great. Yeah, just hadn't had time to look at the table, thanks. Maybe just an overview on capital then. Saw the dividend increase, you've got these deals working. I guess and I got your comments on TCE, probably looking to preserve that in the short run, but just thoughts on -- I heard about the M&A pipeline, but do you digest this -- what do we look for in '21 in all types of capital from M&A. I guess you should be set on dividend, anything -- any thoughts on buyback? Thanks.

Bruce K. Lee -- President and Chief Executive Officer

Bryan, you want to kind of walk through that, explain how we plan to build the capital back up through earnings?

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

Yeah, I think, Jeff, you had it pretty much right. I mean we'll grow back up, as I said, through 8.5% just with earnings projected for next year and the balance sheet growth that we have projected. Now that excludes any acquisitions. And with acquisitions we typically issue stock as part of that. So I think you might see in the first half of the year, things will be a little bit tighter, especially if we do this next round of PPP, so our TCE could stay relatively flat and then really kind of move up in the last half of the year. Earnings -- our payout ratio right now at $0.22 per share is right around 20% of earnings give or take a little bit. So we'll see how earnings go as to whether we could increase that some more, we'll see how M&A goes to see how we need to utilize that capital and right now we don't see any share buybacks in the near horizon, but we'll see how things progress.

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

Okay and one last -- one point Bryan like, I got you. Just, I didn't hear a total non-interest income. I think you piecemealed it, but is there a run rate with kind of all-in acquired loans what you are looking for in the first quarter of the non-interest income?

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

Yeah, I think -- just shuffle piece of paper here. If you kind of look at the core, so if you back out the gains and losses, I think the core is about $30 million, which really is about the same as what it was a quarter before. So we've been running about $30 million of non-interest income. Two more months of Aim and Johnson should add about $2 million, but probably see a little bit of seasonality. So I'd probably say in the first part, I would probably be somewhere in that $31 million to $32 million and then you'd probably come up with some seasonality and better mortgage fees coming through, probably up to $32 million or $33 million as you go across the mid quarters and maybe back down to $30 million or something like that. So --

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

Okay. That's helpful. And you said mortgage for the full year down 15% year-over-year, but just try to bake in that seasonality.

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

Yeah, yeah, I would say kind of just last year and kind of maybe drop them all about that 15%, you probably get about the right seasonality for that.

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

Okay, I'll step back. Thank you.

Operator

Thank you. Our next question comes from Andrew Liesch from Piper Sandler. Your line is open.

Andrew Liesch -- Piper Sandler -- Analyst

Hey, everyone. Good afternoon.

Bruce K. Lee -- President and Chief Executive Officer

Hi, Andrew.

Andrew Liesch -- Piper Sandler -- Analyst

Just wanted to touch base on the loan growth forecast. I know in recent years, growing organically has been a little bit challenging. Some of that has been by design though. I mean what gives you confidence, what are your borrowers telling you right now so that it gives you confidence that you'll hit mid-single digit growth this year?

Bruce K. Lee -- President and Chief Executive Officer

Yeah, I'll take that one, this is Bruce. Our pipelines are reflecting that there is significantly increased activity. We did get organic growth in the fourth quarter in the commercial portfolio. We also are running and focusing on the consumer portfolios. So we don't think that we're going to run into those headwinds and our applications during the first quarter would reflect organic growth in the consumer portfolio. So we think between what we have in our pipelines and quite frankly in the last six months, we've hired new commercial leaders in four of our 11 markets and that is also boosting some of the pipeline activity. So between additions of talent for getting away from or learning to call in the COVID world, our pipelines are filling up.

Andrew Liesch -- Piper Sandler -- Analyst

Got it, great. That's good to hear. Bryan, just on your margin outlook, what does that assume for I guess liquidity there. I mean that can be such a wild card and a driver of it. I mean I guess what's the right average earning asset types we're using. What are you guys seeing for deposit flows and yeah, how large of a balance sheet should we be looking at?

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

Yeah, I think the balance sheet will go up a little bit, but remember there is PPP in there that we'll be paying off and then some will come back on. So it's really -- I would say, slightly growing. Going to grab my budget here real quick, but I think we're up you know, net of -- I would say we're going to probably be up $200,000, $300,000 just $100 million just on overall assets, but again, there's going to be lots of churning, right, because we've got flow coming off of the investment portfolio that we'd like to turn into loans rather than just grow the balance sheet. So I don't know that you're going to have a hugely larger balance sheet than we have today, but hopefully a better mix of earning assets kind of help deploy the --

Andrew Liesch -- Piper Sandler -- Analyst

Got it. Okay, that's helpful. I'll step back. Thanks.

Operator

Thank you. Our next question comes from Terry McEvoy of Stephens. Your line is open.

Terry McEvoy -- Stephens -- Analyst

Good evening, everyone.

Bruce K. Lee -- President and Chief Executive Officer

Hi, Terry.

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

Hi, Terry.

Terry McEvoy -- Stephens -- Analyst

Hi, if I just look at Heartland's stock, it's up 50% almost exactly since the end of September and my question is what are pricing expectations for banks that are $1 billion to $3 billion of assets that kind of fit that criteria. Have pricing expectations kind of corresponded with publicly traded bank stocks?

Bruce K. Lee -- President and Chief Executive Officer

Terry, I would say they have moved up. It was pretty tough going there when we were at our lows, but I do believe people are starting to say, if you are trading at x times earnings and x times tangible book, then can't we expect something in that range or better.

Terry McEvoy -- Stephens -- Analyst

Thank you. And Bryan, just want to clarify the margin guidance of 3.50% [Phonetic], that incorporates the remaining PPP fees from round one as well as a step up in anticipated accretion from the deals that closed in the fourth quarter?

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

Correct. Yeah, I wouldn't have any PPP too because I'm not sure what that is yet. So that's correct.

Terry McEvoy -- Stephens -- Analyst

Okay and then just last question here. I mean, in the press release, I've got here charge-offs could be elevated given that they were just 1 basis point here in the fourth quarter. Any thoughts on charge-offs, I know Bryan, you talked about the provisions, but the elevated, I won't say it scared me, but it caught my eyes as I read the release.

Bruce K. Lee -- President and Chief Executive Officer

Nathan, you want to comment on that?

Nathan Jones -- Executive Vice President, Chief Credit Officer

Yeah as we continue to work with our customers and really look at the cycle, kind of what's coming, we do realize and it's certainly our allowance has been elevated to account for that. We maintained a very conservative approach, but I don't know if the word elevated is probably being used in the right term. We're really just looking at it from a perspective of where it has been and just looking at it over the next year and thinking it's probably going to stay more in that range. I think the guidance Bryan gave earlier was really around at $35 million. So seeing it elevated from this last quarter I think looking out next year, I think it's appropriate to probably look at the range. Bryan, is there anything you'd like to add as far as additional color there as far as what you gave as far as guidance.

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

Yeah I think what I probably would say Terry is, we had I think 32 basis points for the full year this year, but it was real choppy. I think you're going to continue to see choppiness and hopefully it will be better, but you could see it pop up into that range again. A lot of that though I think, if we've done our reserving correctly under CECL, we have a lot of that already reserved for and how we've already got some economic components in there. We've been picking up the downgrades as those have been happening. So if those do end up in charge-offs, we've been increasing the reserve as we go. So we could see some elevated. I think it's hard to say that they wouldn't go up given that we're not out of the pandemic yet and we only had the 1 basis point this last quarter. [Speech Overlap].

Bruce K. Lee -- President and Chief Executive Officer

So Terry, how I would maybe frame it, it's going to be elevated from historical levels of in that sort of that 10 basis point range. Clearly 1 basis point was outstanding and we're very pleased with that in the fourth quarter, but we think it's going to be elevated from historical levels, probably a lot closer to the 30 basis points to 35 basis points for the year going forward if we had to give you specific guidance.

Terry McEvoy -- Stephens -- Analyst

Great, appreciate that. Thank you.

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

I think the key there, Terry, is that we've already provided for it. So even though we have the net charge-offs, they are bit elevated over historic levels, we're not going to have to be providing for it, it's already in the reserves.

Terry McEvoy -- Stephens -- Analyst

Thanks.

Operator

Thank you. [Operator Instructions] You have a question from Damon DelMonte of KBW. Your line is open.

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

Hey, good afternoon guys. Hope everybody is doing well these days. A lot of my questions have been asked and answered, but just maybe broadly speaking on the outlook for M&A, do you feel like the dialog with potential targets has been increasing and is it reasonable to expect one or maybe two deals that could be announced here in 2021?

Bruce K. Lee -- President and Chief Executive Officer

Yeah, Damon, I would think that you could expect maybe two deals announced, but we would only have the Aim conversion, which is going to take place mid-February and then probably anything else would be converted in the third quarter. We might have two announcements, but we probably push out the next announcement into the first quarter of 2022. We have a number of Tier 1, Tier 2 projects that we need to get done.

So I would expect only two conversions this year, the AimBank conversion and maybe one additional one, but you may hear about another opportunity announced. There is still pretty active group of prospects that we're working with right now. So you never know if you're going to get them or not, but there is some active opportunities that we're working on right now and some of them have advanced in time. One very nice acquisition we thought would be may be coming around in the second half of this year and it seems to be advancing into the first half of this year now.

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

Got it. And with respect to geographic focus, is one area of the footprint more attractive these days and present better opportunities than others.

Bruce K. Lee -- President and Chief Executive Officer

Well, we actually have relationships across all of our markets as well as new markets, but as I've said in the past, we really are focused on in-market transactions. They provide greater synergies and they give us more market dominance in the markets we're in. So the one we're working on right now is Midwest and the other one that I was talking about or other two would be out West.

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

Great, very helpful. Thank you very much.

Operator

Thank you. [Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call back over to Mr. Lee for any closing remarks.

Bruce K. Lee -- President and Chief Executive Officer

Thank you, Valerie. In closing, Heartland is well positioned for growth, it has strong momentum. We begin 2021 with a balance sheet that grew $4.7 billion in the previous year. Net interest margin is in the 3.5% range thanks to our disciplined deposit pricing, our credit profile is stable. We've consistently lowered our credit costs to deliver our products and services. We expect ongoing benefits from Operation Customer Compass. We continue to invest in technology and improve our processes to enhance the customer experience. We continue to invest in talent that will drive growth and recently added new commercial leaders at four of our member banks.

We will generate mid-single digit organic loan growth in 2021. We'll maintain an efficiency ratio of below 57%. We expect additional revenue and customer relationships from the second draw of PPP. We anticipate $40.5 million of net income in 2021 from the two acquisitions we closed in December, and we continue to have a deep pipeline of attractive M&A prospects with a number of active opportunities. We are moving forward in 2021. We are stronger, we're more nimble and together we are Heartland. Thank you for joining us today. Our next quarterly conference call is scheduled for Monday, April 26th. Have a great evening.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Lynn B. Fuller -- Executive Operating Chairman

Bruce K. Lee -- President and Chief Executive Officer

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

Nathan Jones -- Executive Vice President, Chief Credit Officer

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

Andrew Liesch -- Piper Sandler -- Analyst

Terry McEvoy -- Stephens -- Analyst

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

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