Glacier Bancorp Inc

F:GLC

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:04] Ladies and gentlemen, thank you for standing by and welcome to the Glacier Bancorp third quarter earnings conference call. At this time, all participants are small, remote after the speaker’s presentation. So be a question and answer session to ask the questions during session even faster than one on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, press zero treach, not Bridget. I'm not getting the call. Over to Randy Kessler, CEO of Bancorp. Please go ahead.

[Randy Chesler, President and Chief Executive Officer]

[00:00:36] All right, thank you, Michelle. And good morning and thank you for joining us today. With me here in Kalispell this morning is Ron Culver, our chief financial officer is with Doce, our chief accounting officer, Byron Polin, our treasurer, and Tom Dolan, our chief credit administrator. Don Cherry, our chief administrative officer, is on the road this week visiting our divisions and will not be joining us today. Yesterday, we released our third quarter 2020 earnings. And today, we're ready to review the state of the company and the financial results. The third quarter results show another very solid performance from the glacier team and once again highlights the strong core of the company and the strength of our team and our business model, despite the stiff headwinds generated by the global covid-19 pandemic and the related economic and social impacts. covid rates now appear to be spiking in some of our Western states, and while most of our business operations remain uninterrupted, this is a circumstance that we're watching closely.

[00:01:44] We continue to navigate through the ongoing pandemic extremely well. And I'm exceptionally proud of the glacier team, our senior staff at the holding company, as well as our bank presidents and their teams for their commitment and leadership and their service to their communities that they have demonstrated this year. Despite coved the pandemic, we are amazed at how well our customers have adjusted to the circumstances and are carrying on with business or residential mortgage, volume is at record levels with refinancing and new home purchases. Our commercial lending business is beginning to pick up, and many of our business customers report they had a very good summer and early fall season. The performance of our loan portfolio continues to show that our conservative approach to credit really pays off during times like these. And we've seen some increase in digital transactions, but our branch transactions have remained steady. We continue to watch the numbers but have not seen a major shift in the mix.

[00:02:54] Our markets were strong before the pandemic. Driven by high quality of life, business friendly environments and low cost of living. And we are seeing signs that the natural social distancing that comes with our more rural markets will only add to the attractiveness of our footprint markets. Once again, the third quarter results highlighted the consistent strength of our core business. We reported earnings per share of 81 cents a forty two percent or twenty four percent increase from the prior year. Third quarter net income of seventy seven point eight million, which is an increase of twenty six point two million or fifty one percent from the prior year. Third quarter. Highlighting the company's core earnings during the pre-tax pre pervasion, net revenue for the quarter was ninety nine point four million, which was up 56 percent from the prior year. Third quarter. Copper deposits increased eight hundred and sixty eight million or six point five percent over the prior quarter, with non-interest-bearing deposit growth of four hundred and thirty six million or eight point six percent. Non-interest-bearing deposits were thirty 39 percent of total core deposits at the end of this quarter, compared to 35 percent at the quarter a year ago. Deposits continue to flow onto the balance sheet as a result of customers reduced spending and unprecedented government physical fiscal stimulus and monetary policy. We're pleased to see our cost of copper deposits declined 11 basis points from 14 in the prior quarter to 21 in the third quarter a year ago. Total debt securities increased five hundred and eighty two million or 16 percent during the quarter and increased one point six billion or 60 percent from the prior year, third quarter. The return on our debt securities reflected the impact of lower for longer interest rates, ending the quarter at two point seventy two percent, down forty five basis points from the prior quarter due to purchasing new securities at current lower market rates.

[00:05:22] That security income was twenty five million, which was materially unchanged from the prior quarter and an increase of 19 percent over the prior year. Third quarter. We're taking a cautious approach to new investments, given current low rates and risk at some point of deposit outflows, and we're targeting a shorter average life while maintaining higher levels of liquidity. The loan portfolio organically increased one hundred and sixty five million or one percent in the quarter as we saw an increase of activity to our markets that was driven by pent up demand from the first half of the year. The growth was well distributed across our footprint and the quality was reflective of our conservative approach to credit. At the end of this quarter, we had made over 16000 triple P loans for one point four seven two billion. As part of this effort, we acquired over 3000 new customers who received triple P loans from us totaling close to two hundred and ninety eight million in loans due to several competitors that were struggling with offering this program. Expanding these new high quality relationships helped drive some of our growth in loans this quarter. At the end of the quarter, we had thirty six point one million in net deferred fees remaining on these triple P loans. Net income was one hundred and fifty one million, which was an increase of three point two percent or two percent over the prior quarter and increased 20 million or 15 percent from the prior year, third quarter.

[00:07:16] While the industry is dealing with the impact of lower for longer interest rates, we are encouraged by our ability to grow our balance sheet, even if at a slower pace to offset declining in with more net interest income. We feel our strong geographic footprint and the economic and growth advantage to our market areas will enable us to weather the lower for longer for a longer period of time. Net interest margin was tough to hold on to due primarily to the interest rate environment as we saw margin drop again this quarter to three point nine two percent from forty four point one two percent last quarter. Pricing on new production during the quarter was around four point three percent versus our portfolio rate of four point five four percent. The second quarter's new production yield averaged around four point four. The core net interest margin ended the quarter at four point two versus four point two one in the prior quarter and four point thirty five a year ago. The pace of loan forgiveness could help the margin in the next few quarters as fee income will be accelerated upon forgiveness at the end of the quarter. The SBA had not begun to act on loans submitted for forgiveness, but recently started approving those requests. So far this quarter we have received forgiveness from the SBA on two hundred and forty two loans for eight million.

[00:08:59] It's unclear at this point how quickly the SBA will process existing forgiveness requests and how quickly customers will push for forgiveness. Longer term, we still expect lower for longer rates will continue to put downward pressure on our margin. Noninterest income was once again driven by record mortgage production, we put a gain on sale of loans of thirty five point five million, which was almost 10 million over the prior quarter, and an increase of twenty five million over the quarter a year ago. Mortgage purchase and refinance business continues to be very strong. In addition to local demand, we continue to see an uptick in the number of out-of-state buyers accounting for 26 percent of purchases and 31 percent of construction loans in the third quarter. Credit performance was better than expected, with net charge offs of eight hundred and twenty six thousand, compared to one point two million last quarter. Delinquent loans were 15 basis point of loans versus 20 to last quarter and thirty one a year ago, non-performing assets decreased slightly by about a million dollars and were twenty five basis points of assets, which was down two basis points from the prior quarter and was 15 basis points less than the level a year ago. For the quarter, excluding triple P loans are NPAs would be twenty seven basis points of assets, which was a three basis point decrease from the prior quarter. During the second quarter, we made over three thousand loan modifications in response to public concerns on loans totaling over one point five billion, representing about 15 percent of the loan portfolio, excluding triple P loans.

[00:11:08] It's important to note that all these loans that received the modification were performing as agreed before we gave them a modification. In the third quarter, those modifications decreased by one point zero four nine billion to four hundred and sixty six million or four point six percent of the total portfolio. One hundred and five million of these modifications were loans that read deferred and extended their original deferred deferral period for a deferral rate of about nine percent, with no one industry accounting for more than 20 percent. We continue our enhanced monitoring of industries that we think pose a higher risk to the pandemic. The total amount of loans under enhanced monitoring twenty-three is six hundred and seventeen million or six percent of our total loan portfolio, which includes loans to hotel motels, restaurants, travel, tourism, businesses, gaining businesses and oil and gas industry related businesses. We ended the second quarter with 400 million of these loans and modifications status and then in the third quarter with only 77 million in modification, a reduction of three hundred and twenty three million or 81 percent. Despite the steep reduction, we saw modifications in the third quarter, we will continue with our enhanced monitoring process of the entire portfolio and these higher risk industries for the foreseeable future. And we continue with our rigorous approach to managing and proactively addressing any credit issues. In addition to our bank loan modification program, the state of Montana created a grant program for businesses which was only available in the third quarter where customers could get a grant not requiring any repayment, paying for six to 12 months of interest payments with little qualification requirements for customers with loans totaling two hundred and thirty seven million took advantage of that program in the quarter.

[00:13:29] Funding for this program was part of the federal government's Keres Act. Credit loss expense of two point nine million for the quarter brings us to thirty nine point two million for the year. Allowance for credit loss stands at one hundred and sixty four million, or one point for two percent of loans, one point sixty two percent of loans, not including triple P loans, which are one hundred percent guaranteed. We believe this is a very adequate and prudent level given the uncertain circumstances caused by the code, by the impact of covid and the uncertain political circumstances. Total noninterest expense was one hundred and six million, which increased seven point five million or eight percent over the prior quarter and decreased five million or five percent over the quarter a year ago. Forded for the quarter. The efficiency ratio was forty nine point one six percent, an improvement compared to the prior quarter efficiency ratio of forty nine point two nine on a year to date basis. The company's efficiency ratio was fifty point two one. Excluding the impact of that from the triple P loans, the efficiency ratio would have been fifty three point three percent.

[00:14:58] The company's capital levels remain very strong, with CEG one estimate at the end of the quarter and the quarter at twelve point four fifty-three-point percent, up compared to twelve point three five at the end of the prior quarter and down slightly from twelve point five six from the quarter a year ago.

[00:15:17] Tangible book value per share was seventeen point six four at the end of the third quarter and increased from seventeen point eight at the end of the prior quarter and increased from fifteen point five three from the prior years third quarter. Our access to liquidity remains robust, with the growth due to an increase in core deposit and borrowing capacity at the end of the third quarter. The company had access to over 12 billion in liquidity. This includes five point nine billion of unused capacity, with two point six billion at the Federal Home Loan Bank, two point seven billion in borrowing capacity. The Federal Reserve discount window and Triple P liquidity facility. And 600 million of capacity. Akorn correspondent banks in addition to two point one billion and unpledged marketable securities in cash of seven hundred and sixty nine million.

[00:16:20] An additional three point five billion in liquidity is available from other sources, including broker deposits, overplant, securities and loans eligible for pledging at the Federal Home Loan Bank.

[00:16:35] And in December, we declared our one hundred and forty second consecutive dividend of 30 cents a share, an increase of one cent per share or three point four percent. Dividends have been and remains one of our preferred access capital management strategies.

[00:16:57] So overall, the third quarter was another outstanding performance from the Glacier team. And the shell that ends my formal remarks and now like to please open the line for any questions that our analysts may have.

[Operator]

[00:17:16] Well, ladies and gentlemen, to ask a question, please, press star, then one, would you like to respond to a request about? Our first question comes from Jeff Wallis, a D.A. Davidson. Your line is open.

[Jeff Rulis, D.A. Davidson]

[00:17:30] Good morning. Randy, maybe I just follow up on the last bit there. Clearly a unique year and certainly M&A is quiet for this for the time being, or maybe not. But looking at the dividend last couple of years, you've put out a special in the fourth quarter. So, again, a different year. But any thoughts of entertaining that and noting that the pending increase to the regular dividend? That's on the special and any sort of M&A that that could be percolating.

[Randy Chesler, President and Chief Executive Officer]

[00:18:11] Sure. So the special gets early, that's all is evaluated at the end of the year by our board and that's a decision they make. And I'd say in this environment, you know, we're going to have to just see what the landscape looks like at that point in terms of our current capital levels, the feeling of how we're feeling about going forward. So I think that's, you know, a board review decision that will certainly take place at the end of the year. But difficult to tell, especially this year, Jeff, with so much uncertainty. And we'll just have to see at that time, we were pleased to increase the dividend a penny a share to three point four percent. And you can see our dividend payout ratio is quite low. So we're very comfortable where we are. And as I noted, dividends will continue to be a very important part of our excess capital management approach as it relates to M&A. You're correct that, you know, the pause button was hit earlier this year across the board. I think that we're beginning to open dialogue with a number of interested folks and we are hopeful that know the beginning kind of middle of next year will be in a better position to hopefully move forward or make an announcement. We just don't know. It's still a little bit early, but I think there's a lot of encouraging signs. We feel a lot more comfortable with our understanding of our own portfolio and our ability to evaluate a potential seller's portfolio. So, you know, those conversations are beginning to re reopen and we'll see where they lead us where. What hasn't changed is our very disciplined approach to M&A and targets. And so we'll pick up where we left off almost a year ago now.

[Jeff Rulis, D.A. Davidson]

[00:20:34] Ok, and a question on the mortgage side, the NBA forecast has got volumes down maybe 20 percent ish next year. Any reason to think that your experience will be any different in twenty one? Seems like pretty good demand. It's a different dynamic in the footprint. Just starts on the mortgage outlook next year.

[Randy Chesler, President and Chief Executive Officer]

[00:20:59] Yeah, I think that the overall trend in the industry is going to be down a bit after an incredible year this year and especially for us. I think we'll see that, but probably maybe less so than the national because of our footprint and our location and the fact that we are seeing a fair amount of immigration to the extent that rates stay low and that in migration continues, will probably not be immune to a little drop off. But I would expect us not to be as much as the national average.

[Jeff Rulis, D.A. Davidson]

[00:21:45] Ok, thanks, I'll step back. You're welcome.

[Operator]

[00:21:51] Our next question comes from David Ceaser of Raymond James. Your line is open.

[David Feaster, Raymond James]

[00:21:57] Hey, good morning, everybody. Morning, David. I just wanted to start on credit. You guys have done a tremendous job on the deferral front. I guess as we look forward, how do you think about those borrowers that might need additional relief? You plan to grant additional modifications under the care that are probably address those issues head on and put those on non-accrual and TIAR and then maybe how does that translate into thoughts on the reserve going forward?

[Tom Dolan, Chief Credit Administrator]

[00:22:32] This is Tom, I think every bank is kind of treated their modification just a little bit differently. I would say we were we take a little bit more of a lenient approach in an effort to make sure we're helping our borrowers through uncertainty. So while we take a very prudent approach from our credit risk management standpoint by adequately assessing the risk rate and the appropriate accrual determination, if a customer comes to us and says, hey, there's still a lot of uncertainty and, you know, it's troublesome to me, even though I may be doing OK now, we would likely slow down a concession in my case. So, you know, I think it's all really, as Randy said, there's a lot of uncertainty, especially in the fourth quarter with, you know, some key events happening. And I think we'll continue to look at each one of them, you know, on a case by case basis and apply our ongoing consistent credit cards, make the process once we get past the end of the year, barring any type of extension of the Kahrizak. You know, we may look at these a little bit differently from, you know, from a TDR designation as would be required to buy by our regulators or him. So it may look a little bit different next year than it would in the fourth quarter. But again, I think we would take each one on a case by case basis, just like we have been.

[Randy Chesler, President and Chief Executive Officer]

[00:24:02] We think now that David is that bombing team and the chief credit officer, we need to be in, you know, having to stop their stain portfolio grading and analysis. And so they're still proactively managing these as if there were no modifications in place.

[David Feaster, Raymond James]

[00:24:22] Ok, and then just I just want to get your thoughts on the margins. You guys have done a great job on the podcast, despite the fact they're already so low. There's only so much room left there. You know, we got declining new loan yields, even though you guys have done a great job on that. Lower reinvestment rates, just contemplating the, you know, the earning asset remix of deployment of excess liquidity, I guess. How do you think about the near-term and maybe when and at what level do you think we could draw?

[Randy Chesler, President and Chief Executive Officer]

[00:24:54] Yeah, I'm going to let Ron, who studies our margin carefully every day, kind of talk to that. But I just say overall, you know, where the margins are going to drop across the industry lower for longer is something that is you can't defy gravity. However, the net in the net interest income side, you know, we feel our growth, our ability to grow both deposits and loans is very favorable for us because the way to offset a declining in is through, in our view, growing your balance sheet and a strong, strong balance sheet. Difficult to cut your way to success. We've got the engine in the markets that I think will position this very well to offset that lower for longer. But Ron, did you have any comments on that.

[Ron Copher, Chief Financial Officer]

[00:25:55] David, Ron here felt the. Think about the fourth quarter, we're estimating loan forgiveness could be as high as 30 percent. And so when you look back over the second quarter, the third quarter loans being a drag and everybody recognizes that that yield was about to 60 to 65. And so with 30 percent loan forgiveness, our yield just on that could pick up to just under six percent. So that'll influence the margin, but if we exclude TPP just looking the same trend that's happening with the core margins, we back up this down accretion in the TPP, that trend could certainly continue to occur, and especially if we do, Randi, alluding to increase the balance sheet. Hopefully, it's going to be long, but to the extent you know, the investment and the security of lower yields, I think we picked up 90 basis points, the yield on the securities purchases that we picked up in the third quarter. You know, I'd love for that to change. I'd love for the purpose statement, but probably going to just continue. So to Randy's point, we can't provide gravity. We're just pleased that we're starting higher than our peers, much higher.

[David Feaster, Raymond James]

[00:27:20] Ok, that makes sense. And then just I want to go back to the put out new loan production yields. I know it's not as high as you'd like, but, you know, honestly, when we look at some of your peers, it's 50 to 75 basis points better than some of the other banks I've spoken to, I guess. How do you think about the competitive landscape for new credits and your ability to hold yields around these levels? Is it just truly relationship pricing? And then maybe where are you seeing the most growth across your footprint? Just within the area? What segments are strongest? Just your thoughts on that, because this column.

[Tom Dolan, Chief Credit Administrator]

[00:28:00] This is Tom. I'll take that. You know, the way we're able to maintain our pricing advantage is, you know, when you when you look across our footprint, a lot of the smaller markets that we serve, where we have a much larger market share, we're able to hold it better there. Where we face the greater competition is in the larger metropolitan areas like Denver and in the Tucson area and Arizona. But outside of that, you know, given the long standing relationship we have, that that's a benefit as well. And then just the overall market share allows us to try to hold that pricing a little bit. And in terms of in terms of growth, it really is kind of it's been across the board this quarter. I would say some of our new markets have grown a little bit at a faster pace, but certainly not significantly outpacing some of our other markets. So, you know, we've seen some strength in Arizona, Nevada, Utah. And so that's been a benefit as well. And then, of course, is Randy alluded to in his opening remarks, the new customers we paying to triple P, which really was diversified across the footprint, was beneficial to us in the third quarter. So this is more color on that. Just with those three thousand customers thus far, we've granted an additional forty seven million in loans. So that was a pretty good portion of our third quarter growth as well.

[David Feaster, Raymond James]

[00:29:33] How much penetration do you think you've gotten in that clip from those PBT borrowers and how much do you think it is up there?

[Tom Dolan, Chief Credit Administrator]

[00:29:43] I think there is more there. You know, I would say we were probably not even half of the way there, to be honest with you. So we've definitely got some upside there. And the decision banks are doing a great job with their, like, making sure that we're fostering those relationships to not only bring the rest to their credit relationships over, but also the rest of the relationship as well. So we want to make sure that we're we're their primary bank. And I think we saw the way to go on it.

[David Feaster, Raymond James]

[00:30:11] Ok. All right, that's helpful, thanks. We welcome.

[Operator]

[00:30:17] Our next question comes from Matthew Clark of Piper Sandler. Your line is open.

[Matthew Clark, Piper Sandler]

[00:30:23] Hey, good morning.

[Tom Dolan, Chief Credit Administrator]

[00:30:24] Good morning.

[Matthew Clark, Piper Sandler]

[00:30:27] Maybe just starting on mortgage, how much in the way of mortgage production did you sell this quarter versus last? So we can back into a gain on sale margin.

[Randy Chesler, President and Chief Executive Officer]

[00:30:41] You know, well, I believe it was pretty consistent, but I want to double check to make sure, Matthew, it's yeah, it's very pretty safe to say it's pretty consistent to the prior quarter. We sold most of our production.

[Matthew Clark, Piper Sandler]

[00:31:04] Ok. And then on expenses up a little bit here, even, you know, adjusting for the fans. Ninety one, how much of that expense run rate is mortgage related and of that mortgage expense, how much is fixed versus variable? So that that would help us kind of model going forward.

[Ron Copher, Chief Financial Officer]

[00:31:28] Matthew, Ron here, so on the fixed versus variable on the on the mortgage, I would say that no more than twenty five percent of it is variable tied to the production level and then the other expenses that backed up the one point nine million. But just to get to the point, the run rate for the fourth quarter to say it was the one hundred and two to one hundred and three dollars million for the.

[Matthew Clark, Piper Sandler]

[00:32:02] Ok. OK. And then. I guess along those lines, those third party expenses, consulting expenses, that's something that we're going to see more of as you kind of continue along the technology front and kind of upping your game there. Or is it is that truly one time?

[Ron Copher, Chief Financial Officer]

[00:32:28] Yeah, it largely is one time the bulk of that one point nine million was we engaged with third party to help us manage the renegotiation of various technology contracts that were coming due. And so the real point of that story is the good news is that just over the next five years, you know, we could save six million to eight million dollars over that time period. That's 20 quarters. So it'll ramp up. So just thinking, even for the fourth quarter, could be a four hundred thousand dollar reduction. And the reason it's not flat line, straight line is that we have to hit certain benchmarks, certain usage. And as we do, then we will save more. So that's the bulk of it. In any given quarter, we have small time. We use third party. But the magnitude of that one point nine, it will be much lower. You know, we normally don't call it out in the press release. And so I don't expect to have that happen again in the fourth quarter, certainly.

[Matthew Clark, Piper Sandler]

[00:33:33] Ok, and then do you happen to have the average PP loan balance in the quarter?

[Randy Chesler, President and Chief Executive Officer]

[00:33:42] Yes. Of the. We got the third circle is the.

[Ron Copher, Chief Financial Officer]

[00:34:02] Hang on, Matt.

[Randy Chesler, President and Chief Executive Officer]

[00:34:05] Why don't we get back here just to make sure we give you the right number,

[Matthew Clark, Piper Sandler]

[00:34:10] OK? That's all for me. Thank you.

[Randy Chesler, President and Chief Executive Officer]

[00:34:12] Yeah, we're I mean, our average loan, it's going to come in pretty low because 60 percent of our loans are below the 150. So we'll get to the actual number. But we most of our lending was what I call main street lending. And so our average loan size is going to be on the smaller side. But we'll get that to.

[Operator]

[00:34:37] And next question comes from Jackie Bohlen of KBW. Your line is open.

[Jackie Bohlen, KBW]

[00:34:43] Hi, good morning, everyone. Wanting to dig in to new customers a little bit more from both a mortgage perspective up and fees and then also in loan growth. And just to clarify, you said that twenty six percent of purchases and thirty one percent of construction were from out of state. I guess this is a really new customers that were from out of state borrowers. So my assumption with that is that none of that is PCP related. Is that true?

[Randy Chesler, President and Chief Executive Officer]

[00:35:18] Well, these are all residential mortgages, so those were the figures on the residential mortgage. But to my understanding, there was no relationship to triple P on those.

[Jackie Bohlen, KBW]

[00:35:32] Ok? OK, I mean, I figured it would be little if any, but just wanted to clarify that. OK, so you've got two factors at work here where you've got out-of-state people coming in that are either purchasing second homes, are looking to move. And then you've also got this new customer base from new PCP's borrowers, correct?

[Randy Chesler, President and Chief Executive Officer]

[00:35:51] That's right.

[Jackie Bohlen, KBW]

[00:35:53] So when I think about those two trends in tandem and just really round, broad numbers are perfectly fine here, but how much of your growth assumptions in twenty, twenty one are based on those two factors, both continued in migration and maybe even second home purchases? And then also you mentioned that you're not quite 50 percent of the way through converting over peepee customers.

[Randy Chesler, President and Chief Executive Officer]

[00:36:19] Yeah, so we're so we're still working on our 2001 plan, but I would say those are two very important growth aspects. And so, you know that this quarter we saw on the commercial side about 20 percent of the growth was related to the to the new customers that we brought on through triple P. That's got some limitation because we can only penetrate so many of those loans as they come due, but. I think it's early to put an actual number on it for you, but I think those trends are very important in our markets.

[00:37:06] Those people coming and buying homes, we think that that is from outside the market. You know, not something that a flash in the pan. We think that's a part of a longer term trend. And like many things with covid, it's accelerating things that were there. And so we had a migration prior to covid. It's accelerated under now that we're in the middle of covid. And we think that with the changes in technology and work at home, that those things, those are longer lasting and sticky. So those will be we have kind of the third leg to growth is, you know, just our very successful model and the markets that were very well positioned in. And we think our model attracts good quality growth because of our ability to make local decisions in the market for people. So I think those three things, Jackie, are going to be very good, I think, against the backdrop of very uncertain economic growth and probably a little less than we've seen over the prior years. But, you know, I would say it's the two factors you pinpointed, both the immigration and the growth of New York from new customers that we brought in. Will be an important part of our numbers next year, just too early to tell exactly how much, though, Jackie.

[Jackie Bohlen, KBW]

[00:38:49] And if I'm interpreting the comments related to balance sheet side versus net interest margin in the rate environment, it sounds like the goal is to keep your core net interest income. And what I mean by that is excluding TPP and excluding a yield. The goal would be to keep that flat to up in twenty one versus twenty.

[Randy Chesler, President and Chief Executive Officer]

[00:39:10] Yes.

[Jackie Bohlen, KBW]

[00:39:10] OK. Thank you.

[Randy Chesler, President and Chief Executive Officer]

[00:39:14] Very good. Welcome.

[Operator]

[00:39:19] Again, to ask a question, please, press star, then one, our next question comes from Michael Young of Tourists Security. Your line is open.

[Michael Young, Truist Securities]

[00:39:30] Hey, Randy, I want to play so if I'm repetitive in any sense, just let me know. But, you know, I guess just twenty-one on a big picture basis, could you just cover kind of what the messaging is to the to the respective bank presidents? You know, are you really kind of focusing more on cost rationalization and profitability maintenance, or is this go acquire all these new customers moving into our markets and get them locked in? You know, just kind of how twenty-one is that messaging going out at this point? And what are you telling people at this point?

[Randy Chesler, President and Chief Executive Officer]

[00:40:06] Yeah, no, I think that's genius. A couple points to it. Number one is, you know, we're keeping a very close eye on deposit costs. So we have a lot of discussions about lower for longer and how we need to be positioned on those things. And that's really. You know very much a foundational concept that will affect just our whole franchise. And so that's been there's been a fair amount of discussion to make sure, hey, let's keep up with lower for longer and make sure we're keeping pace with a very, very low interest rate environment in terms of the positive cost, in terms of growth. You know, I think the message is we're open for business. We're not afraid to make good loans to good borrowers. We're going to be cautious given the covered issues. And but we are interested in looking at good loans from good borrowers. And I think that, you know, we want to be there for our customers. And I think that's why you're seeing some of the growth coming in this quarter in terms of pricing on those loans. That's another discussion in terms of how do we maintain our margin as strong as we can in the marketplace. So we've talked quite a bit about that. And probably the last thing is, you know, we do we've spent a lot of time earlier this year talking in training folks on how to successfully go after the 3000 new customers we brought on through triple P and get their full relationship in the bank. So those are the areas we're stressing, Michael, and we'll probably continue on those themes for the next quarter as well.

[Michael Young, Truist Securities]

[00:42:15] And that's hopeful and, you know, one other kind of big picture question, just on the net interest margin, you know, as I look back at the company operating through your rate environment, coming out of the last financial crisis for several years, you always maintained kind of a net interest margin of around four percent, excluding, you know, kind of a period of higher premium amortization. So is there anything structurally different in terms of the size of the organization or competition or just maybe the lower, you know, five year rate? Now, that would that would potentially change that on a go forward basis.

[Ron Copher, Chief Financial Officer]

[00:42:52] Michael, Ron here. So do you think back over the time period you were referencing before that especially, you know, the loan book is the primary driver for our margins, and so we typically price off the FASB five year and certainly, you know, that's pretty low, but we've been able to increase the spread. But the just allow me 20 percent of that book turned over. So, you know, we're slow, steady, upward, slow, steady down. And I don't see that happening. You know, lower for longer will be the real challenge, because the curve where we're starting out for this pandemic versus where we were during the Great Recession, it's different. We have a higher, steeper curve compared to the flat line effectively that we have for now. So that that leads us to the curve. I would not even say about the flatness of the curve is really what's going to affect the ability to hold the net interest income, certainly, but the margin as a direct result.

[Michael Young, Truist Securities]

[00:44:01] Ok, that makes sense and but it does sound like you've been able to get some higher spread, so, you know, maybe there's some defense opportunity there, more so than, you know, maybe what the curve would imply is up here.

[Ron Copher, Chief Financial Officer]

[00:44:15] Yeah, it really gets back to the relationship pricing, the need to beat the drum over and over here, but for the bigger banks and the smaller markets and we're able to price the relationship of we're not the mercenaries. We want the whole relationship. We certainly want the deposits. We want the funding with the customer for whom we're going to make a loan. And that really is what helps help this credit to our division. You know, the ability to hold those higher yields on those on those loans just fantastic.

[Michael Young, Truist Securities]

[00:44:54] Ok, great. And just last one for me, and I apologize if this is asked and I missed it or if you already alluded to this, the implications for the tax rate, if there is an increase in the tax rate to twenty eight percent, you know, you guys were pretty low tax payer before that. So if you could just talk about any, you know, kind of what the gearing ratio would be to that increase in terms of your effective tax rate than any DTL or DTA implications as well.

[Ron Copher, Chief Financial Officer]

[00:45:20] Yeah, on the DTL here, just modeling out a tax rate of twenty eight percent versus the twenty one, so the adjustment that would flow through the different repricing of you may be valuing the deferred tax asset that could be as big as a ten dollars million favorable adjustment. Again, this is the opposite of what we live at the end of 17 when they lower the rate we had to write down the deferred tax. That's a one time adjustment. And now we're going to do the opposite. We'll write it up. We'll get a one time adjustment and then we'll give that back over time because will suffer the higher tax rate marginally. And then on the end, the effective tax rate, I could see it going up to twenty three, no more than twenty four percent if the. Federal rate goes to twenty eight percent. I'm more comfortable paying twenty three percent, up from the 19 percent we have right now.

[Randy Chesler, President and Chief Executive Officer]

[00:46:22] As you know, I mean, we feel we're well positioned for both environments. And certainly if tax rates go up, we'll feel a little less because of our significant over supply or oversharing municipal securities in the investment portfolio. So we have a built in kind of hedge there. It's providing good returns today, will get better if there's a tax rate so that, you know, that's the other thing that we in addition to the long time adjustment that we think we're pretty well as well as you could be positioned for increasing taxes.

[Michael Young, Truist Securities]

[00:47:03] And I guess maybe as opposed to that, just I know you guys had some really strong growth in municipal originations a couple of years ago, kind of a competency that you built and had a good product offering there. You know, if we I don't know if you've seen more demand for that and new borrowings, they're generally just with rates being so low and maybe some cash flow shortfalls for municipalities and or do you think that would increase under a higher tax rate regime?

[Randy Chesler, President and Chief Executive Officer]

[00:47:35] So we're very careful about the municipal securities that we do buy in terms of the types and location we can to pick what I call mission-critical, any loans or investments in infrastructure, things that are supported, and one can kind of fill it in. But in the first quarter, you know, we saw a very significant opportunity to pretty much make our full plan year of municipal purchases at a very, very attractive time.

[Ron Copher, Chief Financial Officer]

[00:48:12] Yeah, and that was the strong redemption's the panic in the market, that is about the third week of March and we were able to come in and buy give her the exact number of the just say the seven hundred and twenty million was what we bought. 70 percent of that were municipal, but they were rated AA plus or better. And the yields were just very, very attractive because people were selling the redemptions were coming out at ultra low prices the week we were able to step it all in, including the corporates. The speaking of corporate, the truest type thing, we were able to pick up the tax equivalent yield of four or twenty on that seven hundred and twenty three dollars million that we collectively put in and about a week. And then just on the on the muni loans, we still see we still do see some demand. But you need the municipalities. I think they're a bit reluctant right now to, to borrow. We no projects are being put on hold that we've expressed strong interest in. And so we still have about 600 million dollars of muni loans in our portfolio. They're not really repricing. They're holding up quite well. It's the new production that's really, really slow it down.

[Michael Young, Truist Securities]

[00:49:42] Ok, thanks. Appreciate it.

[Randy Chesler, President and Chief Executive Officer]

[00:49:44] You're welcome.

[Operator]

[00:49:47] There are no further questions like turn the call back over to Randy Chesler for a closer look.

[Randy Chesler, President and Chief Executive Officer]

[00:49:53] Great. Well, we appreciate everybody spending time with us this morning and questions. And we wish hope everyone stays manages through this pandemic. And please stay safe. And we wish everyone a great, great weekend. And thank you for joining us. And we shall thank you for helping us hosts this call.

[Operator]

[00:50:21] You're welcome, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.