Glacier Bancorp Inc  (NASDAQ: GBCI) Q1 2020 Earnings Call Transcript

Glacier Bancorp Inc  (GBCI) Q1 2020 earnings call dated Apr. 24, 2020

Corporate Participants:

Randall M. Chesler — President and Chief Executive Officer

Barry Johnston — Chief Credit Officer

Tom Dolan — Deputy Chief Credit Administrator

Ron J. Copher — Chief Financial Officer

Analysts:

Michael Young — SunTrust Robinson Humphrey — Analyst

Gordon McGuire — Stephens, Inc — Analyst

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

Matthew T. Clark — Piper Sandler & Co — Analyst

David Feaster — Raymond James Financial, Inc — Analyst

Timothy N. Coffey — Janney Montgomery Scott — Analyst

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Glacier Bancorp First Quarter Earnings Release Investor Call. At this time, all participant lines are on a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference to your speaker today, Randy Chesler, President and CEO. Please go ahead.

Randall M. Chesler — President and Chief Executive Officer

All right, thank you, Victor, and good morning and thank you for joining us today. With me here in Kalispell this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; Angela Dose, our Chief Accounting Officer; Byron Pollan, our Treasurer; and our senior credit team, Tom Dolan and Barry Johnston.

We released our first quarter 2020 earnings yesterday, along with supplemental information and we’re ready to review and answer any questions you may have. Before we move to your questions. There are a few points I’d like to cover. First the global COVID-19 pandemic. I believe we’re navigating through the pandemic extremely well and I’m exceptionally proud of the Glacier team, their commitment and leadership and their service to their communities during this time. I also want to thank the people on the frontline in all our markets, the healthcare workers, first responders and other essential service providers for all they’re doing to help our communities get through this health crisis.

The Glacier franchise covers 1500 miles from Montana to Arizona and the impact of the pandemic is different across that franchise. Our unique business model with 16 different divisions, serving over 140 communities provides us with a unique capability to respond to our employees, customers and communities in a way that best suits that local market. Our divisions have taken many actions to help our employees, and most importantly, to ensure their safety. We have removed the caps on benefit time so that our people can take care of themselves or family members without having to worry about using up benefit time. And I’m proud to say that at the beginning of the pandemic, we decided not to lay off any employees during this difficult time. That was the right decision. And as we’ll discuss later, it turned out that we needed everyone on our team to help accommodate and take care of our customers.

The Glacier team has been actively reaching out to our customers since early March. At the very beginning of this worsening pandemic in the U.S., we decided to proactively call our loan customers and let them know that we were here to help them get through any difficulties. We wanted to talk to customers about any concerns that they had about their circumstances and also offered to work with them on business plans to help them get through the pandemic. We provided a number of tools for our commercial lenders to deploy if needed, forbearance, modifications, and later on SBA paycheck protection or PPP loans. We found that many of our customers really appreciated the dialog and it helped to alleviate some of their stress and anxiety. Most of our customers told us they had a balance sheet that could absorb a slowdown, but they were worried about how long they would have to be idle. The actions we took with many customers, whether a deferral or a PPP loan helped strengthen their balance sheet to provide the runway to return to more normal conditions. Most of our customers entered this downturn with good businesses, good staff and good opportunity to grow. And we think those conditions will still be there for our customers with some help as we work through reopening and reenergizing our markets.

And in our communities, we’ve been doing all we can to be a stable and steady source of calm and confidence. We’re supporting food bank networks and other basic needs’ non-profits to help make sure everybody in our communities is cared for and also volunteering to work on various state and local committees on how to safely reopen and how to utilize COVID-specific federal funding. We realize we have a long way to go before we get back to the new normal. But most of the states in the Glacier footprint are well-positioned to safely reopen soon. A number of our states are poised to reopen in the near future because they have the lowest rates of negative effects and are already on a downward trajectory of documented COVID cases.

In addition, we think our western states will become even more attractive once the country opens back up because our tourism is easily accessible by car and the natural attraction of the West with wide open spaces may become even more sought after post pandemic.

I think our first quarter results really highlighted the consistent strength of our core business. Many banks have adopted the Current Expected Credit Loss or CECL accounting standard at the beginning of 2020. And while the CARES Act would allow us to delay the adoption of this standard, we are moving forward under CECL as we are operationally prepared and already internally reporting under this method. We really don’t see much of an advantage of putting off the adoption of the standard that will ultimately be required. However, CECL is being adopted by the banks at the exact time when forecasting future losses to estimate reserves, rather than relying on the past practice of incurred losses is extremely difficult. We are all trying to understand the implications of a global pandemic and the almost complete shutdown of the U.S. economy.

That being said, we believe the $19 million increase in our allowance for credit loss in the first quarter includes most of what we know related to the impact of COVID-19 on our portfolio at this time, and don’t expect further material ACL adjustments related to COVID-19 unless there are major new developments. The model we used as part of the CECL process is the most current available and includes a 2Q unemployment rate north of 15% and a GDP decline of close to 10%. We are expecting to see a longer recovery where unemployment stabilizes at about 10% for the full year of 2020, and then slowly declines in 2021 and starts to normalize in the following years. We expect the same pattern for GDP. The shape of our forecasted recovery is more Nike Swoosh, a slow and steady upturn. This is a conservative approach to our allowance, but consistent with our history. We run towards problems, not away from them.

Early last year, when we started to prepare for CECL, we committed to building our CECL process with best-in-breed partners. Our CECL model was built in conjunction with Primatics, 13 of the Top-30 banks rely on their EVOLV platform for financing credit functions. We use economic forecast from Oxford Economics, a global leader in forecasting and quantitative economics and our model was reviewed and validated by Crowe Global, the 8th largest accounting and advisory network in the world, in addition to BKD, our accounting firm, and also by our own enterprise risk management department. Perhaps more important than the model is the historical credit performance of our loans that are used in that model. We have always believed that our loan portfolio is the backbone of the company and the company has a very geographically diverse loan portfolio spread out over 1500 miles in eight states and in rural as well as urban markets. In addition, our branch footprint encompasses some of the strongest growth markets in the country.

Our portfolio was further strengthened by it’s relatively small commercial real estate average loan size of $500,000 with over 90% of these loans also secured with a personal guarantee. And our credit decisioning is made at the local market level where our teams have a detailed local understanding of borrowers and properties. Our adherence to rigorous portfolio concentration limits and annual reviews by an independent third-party is an important part of our portfolio management process. With these diversification and operational discipline comes tremendous strength. And our portfolio is extremely strong as we enter this pandemic, the strongest it’s been in decades. And as you know, we’ve spent the last three years, preparing for the next recession and we did this while times were good, exiting weaker credits, while the supply of buyers was high.

This performance is reflected in our NPAs to total loans, slowly declining over the last two years to now stand at 26 basis points, which is among the lowest levels in the company’s history. Net charge-offs for the quarter to average loans was very strong, ending this quarter at only 1 basis point.

As a result of our customer conversations and the tremendous publicity about the SBA’s PPP program, we’ve received and approved almost 9000 PPP loans for about $1.1 billion in Phase 1 of the program and have already closed over $800 million in loans and deposited those funds in our customers’ accounts. We also picked up close to 700 new customers who received PPP loans in excess of $100 million due to a number of competitors that were struggling with the PPP program. The Glacier team did an incredible job getting these loans to the businesses that needed them and received numerous compliments from customers on how we were able to take care of them. Many on the Glacier team worked 16-hour days and weekends to get through the tremendous amount of applications that we received. With over 9,000 PPP application and an average loan size of around $150,000, I believe the Glacier team handled more applications per person than most banks our size. We serve Main Street and we’re pleased and honored to be helped so many in our communities.

We also made over 1400 modifications on loans totaling $716 million. We’ve received regulatory flexibility to make these modifications and they give you a good way to help customers get through a severe but short term business disruption like we are now seeing. Both the PPP loans and the modifications help customers maintain and build their balance sheets while businesses wait to reopen.

In addition to relying upon the substantial inherent strength of the loan portfolio, we have implemented enhanced monitoring of the industries that we think pose higher risk due to the pandemic. The total amount of loans under enhanced monitoring is $703 million or 6.98% of our portfolio. This includes loans in the following industries: hotel/motel, restaurants, oil/ gas, travel, tourism and gaming. The largest industry with risk in our portfolio is our hotel/motel loans totaling $466 million or 4.6% of the portfolio. Most of these hotel loans are smaller loans with less than $1.5 million and have an LTV under 60%. Most of you know we haven’t materially increased our position in hotels for over three years. So many of these loans have a good amount of equity. The hotel industry has been hit hard by the virus and will need some time to recovery. We believe our seasoned portfolio is led by a group of very good operators and they’ll work through the current challenges. However, we need to stay close to these customers to work with them along the way.

The next largest exposure in the higher-risk group is restaurants, totaling $132 million or 1.3% of the loan portfolio. Similar to our hotel portfolio, these are smaller loans with an average loan size of less than $175,000 and a group of solid operators. Many of these owners have already started to adapt to a new operating model by shifting to take-out while they wait for the ability to reopen fully. Even with the required social distancing requirements, it looks like most of the restaurant businesses will be able to get back to minimum economics reestablished as a foundation.

There’s also been a lot of discussion about oil and gas and this industry is also in the higher-risk portfolio, but only about $24 million or 2 basis points of the portfolio. We never made too many loans directly in the energy industry because we don’t have the deep subject matter expertise needed to stay out of trouble. Most of our exposure here is to businesses providing the secondary support for the primary producers.

Further supporting the enhanced monitoring portfolio that I just went through, approximately 25% of the loans in this portfolio will have modifications and approximately 15% have PPP loans. So we’ll continue with our enhanced monitoring process for these industries for the foreseeable future.

So for the quarter, the loan portfolio grew $575 million from the last quarter or 6% and this included our acquisition of State Bank of Arizona. Without the acquisition, we grew $124 million or 5% annualized in the first quarter. Core deposits increased $772 million or 7% from the prior quarter, including the acquisition and increased organically $168 million or 6% annualized. Our investment portfolio increased $834 million in the quarter, or 30% due to a $142 million of investments from our State Bank of Arizona acquisition and our purchase of $723 million of municipal and corporate bonds. Debt securities represent 24% of the total assets at the end of the first quarter compared to 20% at the end of the prior quarter and 23% at the end of the prior year quarter.

Margin was also strong. Our core net interest margin ended the quarter at 4.3%, down from 4.33% or just 3 basis points from the end of the prior quarter and was up 7 basis points from 4.26% from the prior year’s first quarter. The yield on the loan portfolio was 5.1%, which was down 13 basis points from the prior quarter and was driven by lower yields on new loans, which dropped about 20 basis points from the last quarter to about 4.8%.

Core deposit pricing was down 1 basis point from the prior quarter and the total cost of funding was down 1 basis point as well. So overall, we’re very pleased with the resiliency and the stability of our core margin. And our mortgage business experienced record volume in the quarter with over $600 million in loans locked versus $250 million locked in the first quarter of 2019. Gain on sale of mortgages was almost $12 million for the quarter compared to about $5.8 million in the first quarter a year ago. Our mortgage business is still active, but it’s a bit too early to see clearly what COVID-19 will do to the business.

And the company’s capital levels remain very strong with CET1 ending the quarter at 12.89%, up compared to 12.58% at the end of the prior quarter and up from 12.2% from the quarter end a year ago. Tangible book value per share was 16.35% at the end of the first quarter and increased from 15.61% at the end of the prior quarter and increased from 14.35% from the prior year’s first quarter.

Our access to liquidity remains robust with growth due to an increase in core deposits and borrowing capacity. At the end of the first quarter, the company had access to over $5.5 billion in liquidity. This includes $3.4 billion of unused borrowing capacity, with $1.8 billion at the Federal Home Loan Bank, $1.3 billion in borrowing capacity at the Federal Reserve and $400 million of capacity at correspondent banks, in addition to $1.8 billion in unpledged marketable securities and cash of $273 million.

In March, we declared our 140th consecutive dividend. With our robust capital and liquidity position, we don’t see any change in our dividend strategy at this time. Dividends have been, and remain our preferred excess capital management strategy. And finally, before we move on to questions, Our PPNR, pre-tax pre-provision net revenue for the quarter was $75.7 million, an increase of $6.1 million or 8.8% compared to the prior quarter’s PPNR of $69.6 million. Compared to the year ago quarter, the company’s PPNR increased $14.9 million or almost 25%. We believe this clearly demonstrates our exceptionally strong core business.

And we also welcomed employees and the Board from State Bank of Arizona to the Glacier team and are very excited to expand our Foothills division to now cover all the major markets in the state of Arizona. On top of everything else going on, we completed this acquisition and converted it over to our core system in the first quarter. So, Victor, that ends my formal remarks and I’d now like to turn the call back over to you to open the line for any questions that our analysts may have.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question will come from the line of Michael Young from SunTrust Robinson. You may begin.

Michael Young — SunTrust Robinson Humphrey — Analyst

Hey, good morning, everyone.

Randall M. Chesler — President and Chief Executive Officer

Good morning.

Michael Young — SunTrust Robinson Humphrey — Analyst

Hope everyone is doing well and healthy and safe. Wanted to maybe just start off, Randy, heard your comments obviously about potential tourism snapping back more quickly in your markets, given the lack of infection, etc. Can you maybe just talk about current trends, what you guys have seen early on at the current stage and maybe any expectations as you kind of start to get into tourist season in some of your core markets?

Randall M. Chesler — President and Chief Executive Officer

Sure. It’s still a little bit early. And I think that we expect and announced from the Governor of the State, Monday, that it’s going to start the reopening process. We know that Glacier National Park and likely Yellowstone are also making plans to open up as well. So I think the process has begun, and, you know, a little too early to tell exactly what kind of flow that will come in, but I think, as I said, the process has begun, and the point I had made was that we feel well positioned because our markets are really well accessible both by car, which is kind of the ultimate social distancing tourism to take where you can drive in your car through many of these national monuments, and also by air, which I think was going to take a little longer to see exactly how that will pan out. I will tell you, I noted, there was a story that Billings, Montana now has more air traffic then JFK. So that tells you a little bit about what’s happening in this market versus other markets.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay. And I think one differentiator for Glacier versus a lot of other banks that we look at is just the preponderance of really small businesses, you guys are really tight on keeping your loan amounts very small and granular. You kind of mentioned some of the things that are going on. But in general, could you maybe just try to compare and contrast the thought process or give us some insight that you’re hearing, repeated back to you through the 16 Presidents on the small businesses? Are they optimistic that they’re going to come back? Are they holding on to employees? Just kind of, what are you actually seeing on the ground?

Randall M. Chesler — President and Chief Executive Officer

Yeah, I would say, surprisingly optimistic, when we talk to the 16 division Presidents. They’re talking to their customers. I think we have, obviously, a lot of customers weathering these closures in each market, but many of them feel very good about getting back to business. In terms of re-hiring their employees, that is really very business specific. Some have shifted to different modes of operating where they’re still up and running, but they’re doing it all through delivery, rather than even retail stores, rather than having the shop open. From what we hear, it’s been a combination of people getting — coming back to work as a result of the the PPP program. But in other customers, we’ve heard the unemployment is very attractive and so that’s less so. But as things evolve, I think getting the — I think they’ll be fine in terms of their ability to attract the employees back to do the work.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay. And just on the PPP program, I heard your comments, I think you said 9,000 applications, $1.1 billion and then 800 closed. Was that $800 million closed?

Randall M. Chesler — President and Chief Executive Officer

Yes. Yeah.

Michael Young — SunTrust Robinson Humphrey — Analyst

And given that a lot of your customers are smaller, I assume these are kind of smaller ticket loan sizes as well. So should we expect a little higher, maybe fee rate as we kind of look just modeling earnings in 2Q, 3Q and is this more like a 4% sort of fee rate blended?

Randall M. Chesler — President and Chief Executive Officer

Yeah. The average loan size was under $150,000. So I think that’s probably a pretty good assumption.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay. And then I guess maybe the pipeline for Round 2, could you speak to how many new applications you’re seeing or how many maybe are pending, any color there would be helpful.

Randall M. Chesler — President and Chief Executive Officer

Yeah, I’m going to let Barry talk to that. He has been leading our effort on the PPP program. So, Barry, maybe you can just talk about how we’re poised for Phase 2 here.

Barry Johnston — Chief Credit Officer

Yeah, it’s pretty straightforward. We had about just underneath 800 loans were not funded in the process or funded in the first round of funding. So we have those queued up. We’ve received close to about another 1,000 applications. So we will have probably close to, come Monday, I think, is the projected date, when funding for the second phase of the funding will start. So we have probably 2000 applications that we’re looking at for close to about $700 million is where we’re looking, a little less than that depending on how it all pans out. But it’s — we’re ready to go. The team has been working really hard. I want to compliment all of the team members, all of the bank divisions, all of the support from all of the GBCI management groups and operating groups. It’s been really a concentrated effort to generate that kind of volume in a little less than over 10 days. So they’ve done a great job and we’re up to the task for the second phase of the funding.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay, thank you for all the color. I’ll step back.

Randall M. Chesler — President and Chief Executive Officer

All right. You’re welcome.

Operator

Thank you. And our next question is from the line of Gordon McGuire from Stephens. You may begin.

Gordon McGuire — Stephens, Inc — Analyst

Good morning.

Randall M. Chesler — President and Chief Executive Officer

Good morning, Gordon.

Gordon McGuire — Stephens, Inc — Analyst

Maybe probably start with Tom or Barry. Randy, I do appreciate your comments on the high-risk sectors you identified in the deck, but I want to focus on some of the sectors listed in the pie chart on — in the modification chart on, I guess, Slide 3 of your deck, particularly, healthcare, accommodation and retail. I was wondering if you could provide some color on those.

Randall M. Chesler — President and Chief Executive Officer

Sure. I’m going to ask Tom, who’s done a lot of work on that to cover that.

Tom Dolan — Deputy Chief Credit Administrator

Gordon, let me get clear on your question. Some color on the accommodation and food services component of that? Is that what you’re asking?

Gordon McGuire — Stephens, Inc — Analyst

Well, I guess, I’m just looking at the higher-risk segments that you listed on Slide 2, but then it does look like you had a couple other categorizations on Slide 3 that took up a chunk of your modifications and it would seem to imply those might also be a little bit higher risk. I was just wondering if, as far as healthcare, accommodation or retail, if you could provide some color.

Tom Dolan — Deputy Chief Credit Administrator

Yeah. The healthcare side of it, it’s typically the smaller providers that are within that. The CRE is pretty widespread, Gordon, a combination of both owner and non-owner. So in the CRE portfolio there is no one specific segment that stands out.

Randall M. Chesler — President and Chief Executive Officer

Gordon, on healthcare and I think this is the same across a lot of markets that all the elective surgery was postponed and so this is a perfect example of a group meeting, a little bit more runway. We postponed the elective surgeries. Now that things are being turned back on, I would expect a significant surge back into these providers because there has been a lot of medically deferred maintenance that now needs to be taken care of. And — but again a perfect example of a customer — a good customer just needing little more runway to weather the downturn.

Gordon McGuire — Stephens, Inc — Analyst

Do you have the total portfolio balances in that segment? And then I guess, second to that is, is the accommodation and food services — is that just related to the hotel and restaurants that you talked about earlier or is that a separate categorization?

Tom Dolan — Deputy Chief Credit Administrator

The accommodation and food services that’s listed there is really the C&I component of those portfolios, whereas the real estate side of it would be reflected on the CRE side.

Gordon McGuire — Stephens, Inc — Analyst

Okay and then just outstanding balances on the C&I side?

Tom Dolan — Deputy Chief Credit Administrator

I’m sorry, outstanding balances for what sectors, specifically?

Gordon McGuire — Stephens, Inc — Analyst

I guess, if the CRE is disclosed on Slide 2, do you have the related outstanding balances for the C&I segments that are listed in the pie chart on Slide 3?

Tom Dolan — Deputy Chief Credit Administrator

Okay. Gordon, I’ll have to get back to you on the specific numbers for that.

Gordon McGuire — Stephens, Inc — Analyst

Okay. And then just trends on modification requests, I saw these balances are as of April 21. Just curious whether they’re accelerating, stabilizing, slowing down. Just how should we think about with your crystal ball, maybe the next few weeks, few months where that trends to?

Tom Dolan — Deputy Chief Credit Administrator

Yeah. We’ve really seen that level off in terms of request. There is some still that have been approved and not yet booked, but we’re really seeing the request more or less level off in the last week or so.

Gordon McGuire — Stephens, Inc — Analyst

Okay. And then just any color on the past dues and non-accruals, sorry, not non-accruals — the TDRs, it looks like they stepped up a little bit, maybe a few chunks of $2 million to $5 million in a few buckets. I noticed Ag was in there a couple of times. I was wondering if you had any color on that migration.

Ron J. Copher — Chief Financial Officer

Yeah, Gordon, it’s Ron. So with the CECL, certain categories of loans that were not TDRs in prior periods are now designated TDRs. These are performing TDRs with above market rates that are paying. So it’s a technical designation. So nothing significant.

Gordon McGuire — Stephens, Inc — Analyst

Got it. Good. And then last one, Randy, recognizing this might be a little bit premature, but on the acquisition front last recession, you didn’t really step on the playing field for struggling banks. I’m curious if the uniqueness of this being a pandemic situation changes your thinking around that.

Randall M. Chesler — President and Chief Executive Officer

No, we’re still in the market for good banks and good markets with good people and I think they’re still going to be there when this — when the dust settles here. We’re still — all the conversations on both buyers and sellers were put on pause across the board here because of the velocity of this thing unfolding and the implications of it. I think as things get back to a little bit closer to normal, we’ll still be looking for good banks, good markets, good people and I think that we will see a very strong pipeline coming out of this.

Gordon McGuire — Stephens, Inc — Analyst

Sounds good. Thank you.

Randall M. Chesler — President and Chief Executive Officer

You’re welcome.

Operator

Thank you. And our next question will come from the line of Jeff Rulis from D.A. Davidson. You may begin.

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

Thanks, good morning.

Randall M. Chesler — President and Chief Executive Officer

Good morning, Jeff.

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

Just a question on — look, you had asset yields hold up pretty well in the quarter and I assume that was from kind of some of the remix you did of cash and the securities. But if you could just speak to sort of, as we kind of fell off a cliff in March share, just sort of margin related questions, I think you’ve addressed your fact that margin on the way up was a measured pace and I think you’ve alluded to kind of on the way down, how that could also be moderate. But any commentary on the margin outlook.

Ron J. Copher — Chief Financial Officer

Yeah, Jeff, it’s Ron here. I’m going to have Byron talk about the floors, but everything is as we said before, so it’s steady up and then steady down but over time and that’s attributed to the loan book. And so the — just on the — you saw the earnings — excuse me, the yields on the loans come down and part of that was we had 523 yield, on the fourth quarter that came down 510. Principally that was driven by lower yields on the loans that were coming on to production. And then also just to the investment side, we did buy the $723 million of combination of units, that with 70% of that and then 30% were the corporates. And just if you think back, I think everybody’s aware on the call, that during that third week of March, there was just a lot of forced selling due to the massive redemption requests. So what happens, obviously, they sell their best assets first. So these are assets securities we would’ve otherwise bought, but we got great yields and so that will bode well for the future, temporarily funded by Federal Home Loan Bank, staying in less than 25 basis points. So that will go a long way to increase the net interest income, the net interest margin to, I should say, to hold it up, put it that way.

We’re thinking the rest of the year will be flat in terms of loan production. I’d say that, knowing that we talked about 700 new customers that came over and we believe they’re going to be bringing deposits and their loan book to us. So that will bode well. But even then we’re already seeing, just through the first 23 days of April, our deposits are outstripping loans. And so, we’ve already been able to meaningfully pay down the Federal Home Loan Bank advances. More importantly, there is room to lower the cost of our core deposits. We came down 1 basis point, but we will be able to do more with that as well. So overall, we feel pretty good about the margin doing well.

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

Great, thanks. And maybe just looking at expenses would have stayed bang on for the full quarter in the second quarter. But some moving pieces to it, if you could just speak to kind of remote working or other added expenses where you may trim expenses if it’s corporate travel or other — just any thoughts on the expense line as it — whatever $92 million this quarter with some merger costs in there.

Randall M. Chesler — President and Chief Executive Officer

Sure. No, I was just going to say, you know, I think there is — your question is opportunity to reduce expenses. Maybe T&E, we certainly haven’t done a lot of traveling and one of the things I should note that the conversion of Foothills was our first virtual conversion. We had about 10 people on the ground, turned out to be among one of our best. So we are learning from this as well rather than having 20 to 30 people on the ground that there’s ways to operate. So there may be some pickup there, Jeff, but little early to tell, but business as usual for the most part, other than the things going on that we talked about. But the T&E is the one that we probably see the most change in.

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

Okay. Thanks, Randy.

Operator

Thank you. Our next question will come from the line of Matthew Clark from Piper Sandler. You may begin.

Matthew T. Clark — Piper Sandler & Co — Analyst

Hey, good morning, guys.

Randall M. Chesler — President and Chief Executive Officer

Good morning.

Matthew T. Clark — Piper Sandler & Co — Analyst

Just on expenses, the decline in unfunded commitment expense. Can you remind us what drove that decline? I would have thought that would have gone up with people taking — pulling down on lines in this environment, but can you just remind us what drove the decrease and should we think of it as being transitory or is that permanent?

Tom Dolan — Deputy Chief Credit Administrator

I would say where it’s at — this is Tom Dolan, I’d say where it’s at today is probably where you will see it for the time being. In terms of line draws, we haven’t seen a material uptick in our line of credit draws, especially the revolving lines. They’ve remained fairly constant over the past 60 days, unlike some of the other banks that we’ve seen and had reported. So I think that’s really attributed to our bankers getting out in front of our customers early on this thing. What really drove the decrease on the unfunded size was just a change in historic loss rates, whereas the forecast really has a little bit more of an impact on the C&I book rather than construction development, those types of portfolios.

Matthew T. Clark — Piper Sandler & Co — Analyst

Okay. And then on loan pricing, have you seen any uptick in loan pricing? I know rates have come down in general but credit spreads have widened. Has there been any incremental improvement in loan pricing or is there still pressure?

Randall M. Chesler — President and Chief Executive Officer

I’d say we saw one thing, I think our ability to get margin over the base rate has gotten a little bit better and so certainly over the last quarter, we’ve started to see that. So where we’re able to price a little bit wider over the most of our business price off that Federal Home Loan Bank five-year. And so I think we have seen our ability to get a wider spread on that than we had in the past.

Matthew T. Clark — Piper Sandler & Co — Analyst

Okay and then just on the organic loan growth outlook. Coming into the year or in January, you talked about 5% to 6%. You guys hit it this quarter, which is pretty impressive in this environment. How do you feel about that level of growth for the year?

Randall M. Chesler — President and Chief Executive Officer

Yeah, it’s — we talked a lot about that. We still expect to be slightly up to flat for the full year. It’s just a little — I think we need a little more time this quarter to see just how activity flows in. But right now, we’re looking slightly up to flat for the full year.

Matthew T. Clark — Piper Sandler & Co — Analyst

Relative to the 5% to 6%, you’re saying.

Randall M. Chesler — President and Chief Executive Officer

On a — well, starting point at the beginning of the year will be up slightly and slightly to flat, if you take our kind of beginning year starting point.

Matthew T. Clark — Piper Sandler & Co — Analyst

Okay.

Randall M. Chesler — President and Chief Executive Officer

A little less than 5%. Yeah, I think, kind of, 1%, 2%, possibly to flat.

Matthew T. Clark — Piper Sandler & Co — Analyst

Okay.

Randall M. Chesler — President and Chief Executive Officer

Yeah.

Matthew T. Clark — Piper Sandler & Co — Analyst

And then just on the PPP, the new customers, the 700, I know it’s probably a small dollar amount at $150,000 on average, but I assume you’re going to add some additional new customers with the second PPP tranche. How do you feel about the quality of those new customers? Are they the types of small businesses that you’d like to bank longer term or are you just helping — obviously, you want to help out local communities during this downdrift?

Randall M. Chesler — President and Chief Executive Officer

I would say the majority of those were people that we have been calling on for quite a while to get into the bank and this — the PPP and some of the larger banks’ inability to respond to them was the straw that broke the camel’s back and brought a number of these customers over to us. So quite — less random and more a result of long term calling efforts in this particular — as you’re all aware of all the — some of the problems some banks had in administering this program worked to our advantage and gave the customers a reason to just say, okay, I’m ready to move my relationship.

Matthew T. Clark — Piper Sandler & Co — Analyst

Okay, great. That’s it. Thank you.

Randall M. Chesler — President and Chief Executive Officer

You bet.

Operator

And our next question comes from the line of David Feaster from Raymond James. You may begin.

David Feaster — Raymond James Financial, Inc — Analyst

Hey, good morning everybody.

Randall M. Chesler — President and Chief Executive Officer

Good morning.

David Feaster — Raymond James Financial, Inc — Analyst

Just wanted to start on the securities purchases. Could you give us — that was great to see you guys opportunistically in the market. Just any detail around what’s the — what kind of yields you were able to get. Maybe just any additional opportunistic purchases coming up in the future just given the ongoing disruption?

Ron J. Copher — Chief Financial Officer

Well, okay, let me just speak to what we did in March. So the the muni purchases, highly liquid, high quality. All of those muni’s were HQLA, high-quality liquid assets, that’s technical definition. In fact on entire book, 99% of the muni’s that we own are HQLA. So on the purchases, again 70% of that $723 million were the muni’s, they’re AA+ or higher. So the yields on that — tax equivalent yields are 412, on the corporates, that’s 30%. We were buying the the G-SIB bank. I think it’s true with J.P. Morgan, Bank of America, Morgan Stanley. Reason I bring those is that those are rated — split rated, A, high BBB. The yields on that is 432. When you blend it, all in impact equivalent yield is just about 420 and again we’re financing that temporarily at the Federal Home Loan Bank. I would tell you I don’t expect our cost of funding that to be higher than 25 basis point. We can always go to the discount window, we have been in the borrower and custody program at the discount window since the Great Recession. So we’re very, very comfortable with that.

David Feaster — Raymond James Financial, Inc — Analyst

Okay. Terrific. That’s helpful. And kind of along the same lines, how do you plan to fund the PPP program?

Tom Dolan — Deputy Chief Credit Administrator

So initially the loans will go up and then we’re putting the money — the money is coming into our customer accounts here at the bank, so the funding will be more as they begin to draw that out, say, over the next eight weeks, 10, 12, however long it takes. Obviously, everybody wants to get the debt forgiven as soon as possible. So we will have no problem, whatsoever, funding the draws of that money out as we have to continue to fund the balance sheet. So it’s pretty straightforward process. Randy, in his comments talked about our liquidity. And so I had mentioned earlier that deposits are now outpacing loan growth. So we will absolutely have no problem of funding those.

David Feaster — Raymond James Financial, Inc — Analyst

Terrific. Last question from me. State Bank of Arizona, you got the systems integrated. Just curious how much of the synergies from that deal are already in the run rate. How much have you realized and have you identified any additional synergies that you’re going through?

Randall M. Chesler — President and Chief Executive Officer

Yeah, no, there is a little. I mean we just did it this quarter so I think there is a little bit of additional kind of adjustments to staffing and other things that were part of the announcement. So you’ll see those unfold probably over the next quarter or so. And then I think we’ll be in a pretty good run rate.

David Feaster — Raymond James Financial, Inc — Analyst

Okay, so not much has been realized to date.

Randall M. Chesler — President and Chief Executive Officer

No. No, because a lot of those changes we converted at the end of February and we hold a lot — we hold on to a lot of staffing until we’re comfortable that we have everything in good shape. So, like I said, second quarter probably, second and third quarter you will see more of that.

David Feaster — Raymond James Financial, Inc — Analyst

Okay, Terrific. Thanks, guys.

Randall M. Chesler — President and Chief Executive Officer

You’re welcome.

Operator

Thank you. And our next question comes from the line of Tim Coffey from Janney. You may begin.

Timothy N. Coffey — Janney Montgomery Scott — Analyst

Thank you. Good morning, everybody.

Randall M. Chesler — President and Chief Executive Officer

Good morning, Tim.

Timothy N. Coffey — Janney Montgomery Scott — Analyst

I was wondering with the list of loans you have for under enhanced monitoring, have you seen any deterioration in those credits in the last 30 to 45 days?

Tom Dolan — Deputy Chief Credit Administrator

No. Tim, I think it’s a little too early to tell. We haven’t seen any deterioration as of yet.

Timothy N. Coffey — Janney Montgomery Scott — Analyst

Okay. Given that you’ve been through this cycle before, what makes this one different than the one that we saw between ’08 and 2012?

Barry Johnston — Chief Credit Officer

Actually this is the fifth cycle I’ve seen. I swore I’ll never be here for another one. But the difference — the big difference is the background, the reason for it. You know the 2008 to 2010 was all single-family residential acquisition and development lending that is predicated on sort of certain amount of speculation, minimal if no underwriting [Indecipherable] and spaced on the premise that all the loans would be securitized and sold in the secondary markets where they were at and banks that were caught with volume on their books, primarily for us it was single-family residential construction $750 million, close to $450 million in acquisition and developmentals. So different product types very impacted, not to say that this time around, we just don’t have those concentration levels in those product types. So, it took a lot longer. I think it’s — it took a lot longer from 2008 to 2010 to work our way out of those product types. We had negative loan growth for almost five years as we downsized the portfolio, rebalanced the balance sheet and basically worked on cleaning up our asset quality.

This is a totally different scenario. It’s caused by something that’s external for the most part. It came quickly. It was the black swan, if you will. And based on what we see, it’s not going to be as as long as the recession that was generated by the downturn and single-family residential lending. As soon as the shelter in place and the business closure mandates are lifted, I think people are going to get back to work. I think consumer confidence is going to improve and we should return to something a little more normal, I would say in six months to nine months, maybe a year. But we do have the ability to weather it and we do have the ability to help those borrowers that are impacted at least on a short term basis by extending payments, generating additional funds for operating cost as they transition to increased occupancy rates and increased restaurant revenues, increased travel, increased tourism and a general increase in the overall economy. It’s just a different feeling that’s going to happen this time versus what happened then. So I believe that once the pandemic is — there is a vaccine or there’s testing, a lot of things are going to return to normal where people are going to go back out and do the things that we’ve always done. So it’s going to be a different environment this time around.

Timothy N. Coffey — Janney Montgomery Scott — Analyst

Okay, I appreciate all the color. Then kind of my follow-up question would be, is the liquidity of your current borrower different than it was in the last cycle?

Barry Johnston — Chief Credit Officer

Yeah, I think it is. Most of them are pretty well positioned not to say that they are all looking down the road, when you have hotels, at 15%, 20% occupancy levels. They are adjusting staff accordingly. Some hotels have opted to close operations entirely during the transition. So they’re reserving as much cash as they can. And in a lot of cases, where we have deferred payment, some of the borrowers that were in that type of circumstance, we can defer principal and interest. They just opted for principal and which bodes well, I think, tells us that they have the resources and liquidity to withstand a downturn now for three, four or five months maybe, one or two years, no. But I think the return to normal operations is going to happen before we get into a point where we have to take pretty conservative measures to collect on our own.

Randall M. Chesler — President and Chief Executive Officer

And Tim, I made the point early on that coming into this pandemic, the portfolio and the borrowers were, if you look at the — by the numbers, are among the strongest in the company’s history in terms of their shape. So a lot of — number of good years leading up to this relatively conservative — that individual customer balance sheet management. So we come into it very well-positioned.

Barry Johnston — Chief Credit Officer

Yeah, just one thing, I’d like to add. In the 2008 to 2012, basically ’12, it was a four-year recovery. The regulatory environment was a little bit different. So it was predicated on asset based. You have assets so we were given jingle mail, a lot of foreclosures, losses were just straightforward, you’d get a home back, you’d get it appraised, you’d sell it and you’d take your loss. In this case, it’s going to be more on the operating end and not so much on the collateral end, it’s going to be ensuring that these businesses get back up and running, start generating revenues and profits. And so the regulatory environment are looking at this portfolio. I think it’s going to be a little more conducive to working with borrowers than they previously were. It was truly, got the asset back, you’d have to liquidate it and take your loss. In this case, I think they have already come out with guidelines that said work with the borrowers, we understand where you’re at. This is a once-in-a-generation type event. So I think that’s going to bode well for us as we move forward.

Timothy N. Coffey — Janney Montgomery Scott — Analyst

Okay. And then in order to kind of execute on that Nike Swoosh type of recovery, it sounds like you’re somewhat dependent on the rest of the country to open. I mean if Montana is going to be able to open on Monday and you’re able to social distance, anyway, it sounds like you’re going to need more of the rest of the country to get going to really kind of execute that Swoosh. Am I reading that correctly?

Randall M. Chesler — President and Chief Executive Officer

Yeah, I think, step one is we have to be open for business. I think we’re on the path to that. I think some of our neighboring states are on a similar path. And then step two, we have the rest of the country, I think at different stages, following behind that. And that’s the reason for the longer-term view that I tried to lay out which is, yeah, we see things getting better. It’s just going to take time, and we’re not expecting a big surge. It’s just a low, slow, a longer slow back to normal pace.

Timothy N. Coffey — Janney Montgomery Scott — Analyst

Okay, all right. Those are my questions. I appreciate the color and definitely appreciate the supplemental to your earnings release today or of yesterday. Thank you very much.

Randall M. Chesler — President and Chief Executive Officer

You bet.

Operator

Thank you. And our next question will come from the line of Jackie Bohlen from KBW. You may begin.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Hi, good morning everyone.

Randall M. Chesler — President and Chief Executive Officer

Good morning.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Just another quick follow-up question on the change in the unfunded commitments. Was that the change that related to the historical losses? Any of that impacted by the application of CECL?

Tom Dolan — Deputy Chief Credit Administrator

No, it had to do with really the change in the economic forecast which shifted more towards different segments of the portfolio.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Okay. Okay. I just wanted to double check on that. And then the — and I realize there’s a lot of moving pieces going in here with acquisition charges and deals closing and everything else, but the delta between the other expense line between 4Q and 1Q was a lot more significant than just that piece of it. Was there anything unusual or was it all just the moving parts of the acquisitions?

Ron J. Copher — Chief Financial Officer

Yeah. Jackie, it’s Ron. So certainly, the reduction in the acquisition expenses linked quarter $4.4 million in Q4 versus the $2.2 million in Q1, but the $3.6 million reduction relating to the unfunded commitments, that went through other expense, non-interest expense. And so that existed and Tom mentioned earlier that we see that, but where we are right now, we shouldn’t see that again. That should stabilize. So that will be the delta.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Okay. And then, it sounds like other line item variances in there, just kind of normal course of business.

Randall M. Chesler — President and Chief Executive Officer

Yes.

Ron J. Copher — Chief Financial Officer

Yeah.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Okay. And I just wanted to clarify, did you do one conversion during the quarter or two?

Randall M. Chesler — President and Chief Executive Officer

Just one. So we…

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Just the one.

Randall M. Chesler — President and Chief Executive Officer

Yeah. So we closed State Bank of Arizona in the first quarter and also converted it.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Okay. So — and I apologize that I somehow missed this, when did the Heritage acquisition close? Because I had — for some reason, I have that in my notes that, that was a late 1Q conversion and the State Bank of Arizona was later in the year.

Randall M. Chesler — President and Chief Executive Officer

Yeah. We shifted things around. So your recollection is correct in that. We decided to kind of substitute the spot we had for Heritage and do State Bank of Arizona in the first quarter because when we do an acquisition where we have two brands in the market, Foothills and State Bank of Arizona and we make an announcement, sometimes customers, the next day, show up in the branch wanting to do business if they’re a State Bank of Arizona customer in a Foothills branch and etc, and and the opposite. So we wanted to get that converted. So we were on one system, and so we did shift it. We are going to convert Heritage in June. So that’s the next one.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Okay. Okay, thank you. That’s really helpful. And just in terms of cost savings related to Heritage, are there still — obviously, it’s a little bit surrounding the conversion, but is it anything meaningful that’ll come out or have you already realized a lot of those?

Randall M. Chesler — President and Chief Executive Officer

Yeah, well, let’s start with Heritage. When we acquired it, it was running at a sub-40 efficiency ratio, so highly, highly efficient and we didn’t model in a lot of saves there. And I think until we get through the conversion, what we did have in there, which was pretty minimal, will really start to come through. But that’s a very, very efficient Bank and so our modeling on that was pretty minimal expense save on top of how they were already running.

Jacquelynne Bohlen — Keefe Bruyette & Woods, Inc — Analyst

Okay. Okay, great, thank you very much.

Operator

Thank you. And our next question will come from the line of Michael Young from SunTrust Robinson. You may begin.

Michael Young — SunTrust Robinson Humphrey — Analyst

Hey, thanks for the follow-up question. Ron, I wanted to really quickly just touch on the tax rate. It was a little bit lower. I assume that’s related to the securities purchases, maybe a little lower income projection for the year. But is that the level we should expect going forward at 18%?

Ron J. Copher — Chief Financial Officer

Yes, that is. Yeah. We’ve also got more tax credits coming on from the investments we did last year, low-income housing tax credit that will start to show up as well.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay, perfect. And then two quick little follow-up questions. Randy, just generally, given the timing of when this has hit, this is kind of, I would assume, the shoulder season for much of your footprint, anyway. So has this really been much of an impact to current performance so far and it’s more about how long this last through more of the busy travel tourism season into kind of June, July, August?

Randall M. Chesler — President and Chief Executive Officer

Yeah, I think you have it exactly right. It hit at a time when — a lot of places, this is their slowest. This is the slowest part of their year. So, yeah, it’s all about getting back in business for the summer.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay. And I guess just the last question would be just sort of, you’re probably more in touch politically with what’s going on in your markets. But it sounds like there is a willingness to open up, there’s not a lot of backlash or concern about sort of importing the virus, so to speak, that would prevent more of a reopening.

Randall M. Chesler — President and Chief Executive Officer

I think the Governor has done a terrific job here and I think the people are behind the plan and we’ve got a good plan for a staged reopening and I haven’t heard or seen of a lot of you know kind of backlash to that plan. I think it’s measured, it’s very well laid out. And I think that as it relates to other people coming in, you know, I think a lot of the other markets aren’t too far behind where we are. It’s just going to take a little bit more time. But in terms of the reopening here and probably in Wyoming, we just — I think the folks are ready for that. And I think there is some good plans to move forward with it. So, no, I don’t — I haven’t seen any kind of material disagreement with that approach.

Michael Young — SunTrust Robinson Humphrey — Analyst

Okay, thank you.

Operator

Thank you. I’m not showing any questions at this time.

Randall M. Chesler — President and Chief Executive Officer

All right. Victor, well, thank you. And I want to thank everybody for dialing in today. Have a great day and a terrific weekend. Thank you.

Operator

[Operator Closing Remarks]