Glacier Bancorp Inc
NYSE:GBCI
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All right. Thank you, Victor. 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 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 front line in all our markets, the health care 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 1,500 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 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 teams have been actively reaching out to our customers since early March. At the very beginnings 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 offer 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 with deferral or PPP loan, helped strengthen their balance sheet to provide the runway to return to a 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 realized 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 maybe come in 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 a 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're 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 seasonal 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 a 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 evolved platform for finance and credit functions. We use economic forecasts from Oxford Economics, a global leader in forecasting and quantitative economics. And our model was reviewed and validated by Crowe Global, the eighth 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 in 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 1,500 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 is further strengthened by its 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 this 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 SBAs PPP program, we've received and approved almost 9,000 PPP loans for about $1.1 billion in phase one 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 complements 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 held 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 1,400 modifications on loans totaling $716 million. We've received regulatory flexibility to make these modifications and they could be 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 portfolios are 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 have 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 recover. 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 is the higher risk group and 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 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 the 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 have modifications and approximately 15% have PPP loans. So we'll continue to 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 $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 and 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, PP&R 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 PP&R 69.6. Compared to the year ago quarter, the company's PP&R increased $14.9 million, or almost 25%. We believe this clearly demonstrates our exceptionally strong core business. And we also welcome the 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.
Thank you [Operator Instructions]. And our first question will come from the line of Michael Young from SunTrust Robinson. You may begin.
I wanted to maybe just start off, Randy, I heard your comments, obviously, about potential tourism snapping back more quickly and your markets getting the lack of infection, et cetera. 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 and some of your core markets?
It’s still little bit early. And I think that we expect an announcement from the governor of the state on Monday that'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 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 than JFK, so that tells you a little bit about what's happening in this market versus other markets.
And I think one differentiator from glacier versus a lot of other banks that we look at is just the preponderance of really small businesses you guys are really tied 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 for your 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?
I would say we surprisingly optimistic that we talked 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 rehiring 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 PPP program, but in other customers we've heard the unemployment is very attractive and so that's less so. But as being evolve, I think they'll be fine in terms of their ability to attract the employees back to do the work.
And just on the PPP program, I heard your comments I think you said 9,000 applications 1.1 billion, and closed with that 800 million close?
Yes.
And given that a lot of your customers are smaller, I've seen 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 to just modeling earnings in 2Q, Q3, is this more of like 4% sort of fee rate of blended?
The average loan size was under 150,000. So I think that's probably a pretty good assumption.
And then I guess maybe the pipeline for round two. Could you speak to how many new applications you're seeing or how many maybe are appending? Any color there would be helpful?
I'll 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 two here.
Yes, it's pretty straightforward. We had about 700, just underneath 800 loans. We're not funded in the process, we're funded in the first round of funding. So we have those queued up. We've received close through about another thousand applications. So we'll have probably close to come Monday I think it’s the projected date one funding for the second phase of the funding will start. So we have probably 2,000 applications. We're looking at for close to about 700 million where we're looking a little less than that, depending on how it all pans out.
But we're booked and we’re ready to go. The team has been working really hard and want to complement 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 off, they've done a great job. And we're up to the task with the second phase of the funding.
And our next question comes from the line of Gordon McGuire from Stephens.
Maybe, I’d probably start with Tom or Barry. Randy, I do appreciate your comments on the high risk sectors you identified in the deck. But I wanted to focus on some of the sectors listed in the pie chart 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?
I’m going to ask Tom, who's I want to work on that to cover that.
Gordon, let me get clear on your question. Some color on the accommodation on food services component of that. Is that what you're asking?
Well, I guess I'm just looking at the high risk segments that you list 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 apply those might also be a little bit higher risk. I was just wondering if as far as healthcare, or accommodation or retail, if you could provide some color?
Yes, the healthcare side of it. You know, it's typically the smaller providers that are within that. The theory is pretty widespread, Gordon, a combination of both owner and non-owner. So in the CRE portfolio, there's no one specific segment that stands out.
Gordon, on the healthcare and I think this is the same across a lot of markets that all the elective surgery was postponed. And so there's a perfect example of a group meeting, a little bit more runway. We've postponed the elective surgeries. Now that things are being turned back on, I would expect a significant surge back into these providers, because there's been a lot of medically deferred maintenance that now needs to be taken care of. But again, a perfect example of a customer, a good customer just needing a little more runway to weather the downturn.
Do you have the total portfolio balances in that segment? And then I guess second to that is, is the accommodation in food services, is that just related to the hotel and restaurants that you talked about earlier or is that a separate categorization?
The accommodation in food services that's lifted there's really the C&I component of those portfolios, whereas the real estate side of it would be reflected on the CRE side.
And then just outstanding balances on the C&I side?
Outstanding balances for what sector specifically?
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?
Gordon, I'll have to get back to you on the specific numbers for that.
And then just trends on modification requests. I saw these balances are as of April 21st. 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?
We really seen that level off in terms of requests. There's some still that have been approved and not yet, but we really seen the request more or less level off in the last week or so.
And then just any color on the past dues in non-accruals, it looks -- not non-accruals but 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 times. I was wondering if you had any color on that migration.
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.
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 thing a pandemic situation changes your thinking around that.
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 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 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.
Thank you. And our next question comes from the line of Jeff Rulis from D.A. Davidson. You may begin.
Just a question on, 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 cash in the securities. But if you just speak to sort of as we kind of fell off a cliff in March here. 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 in a way down how that can also be moderate. But any commentary on the margin outlook?
Jeff it's Ron here. And 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 just on the -- you saw the earnings -- the yield on those loans come down, and part of that was we had 523 yields. On the fourth quarter that came down 510 and principally that was given 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 muni that was 70% of that and then 30% were the corporate.
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 asset securities we would have otherwise bought but we got great yields. And so that will bode well for the future temporary funded by Federal Home Loan Bank staying 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 folded 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 we're already seen 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, those room to lower the cost of our core deposits. We came down one basis point but we will be able to do more with that as well. So overall, we feel pretty good about the margins doing well.
And maybe just looking at expenses, we’d have State Bank on for a full quarter in second quarter, but some moving pieces to it. If you could just speak to kind of remote working or other added expenses or where you may trim expenses if it's corporate travel or other. Just any thoughts on the expense line as whatever 92 million this quarter with some merger costs in there?
I think, there's 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 making some pick up there, Jeff, but a 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.
Thank you. Our next question will come from the line of Matthew Clark from Piper Sandler. You may begin.
Just on extensive, the decline on funded commitment expense. Just 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?
I would say where it sat today is probably where you'll 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 have reported. And I think that's really attribute 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 little bit more of an impact on the C&I book rather than construction development, those types of portfolios.
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 just still pressure?
I'd say we saw one thing, I think that our ability to get margin over the base rate has gone a little bit better. And so certainly over the last quarter, we've started to see that. So we're able to price a little bit wider most of our business price, so the 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.
And then just on the organic loan growth outlook, and coming into the year or in January, you talked about 5% to 6%, you guys hit it this quarter. Just pretty impressive in this environment. How do you feel about that level of growth for the year?
We talk 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 the flat for the full year.
Relative to the five to six you're saying?
Well, starting point at the beginning of the year will be up slightly, and slightly to flat maybe take our kind of beginning year starting point, so little less than that. I think kind of one, two possibly to flat.
And then just on the PPP, the new customers, the 700. I know it's just probably a small dollar amount at 150,000 on average. But I'm assuming 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 want to help out local communities during this down draft?
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 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 less random and more result of long-term calling efforts and 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.
And our next question comes from the line of David Feaster from Raymond James. You may begin.
Just wanted to start on the securities purchases, it was great to see you guys opportunistically in the market. Just any detail around what you bought, what kind of yields you were able to get? And maybe just any additional opportunistic purchases coming up in the future just given the ongoing disruption?
Let me just speak to what we did in March. So the muni purchases highly liquid, high quality, all of those munis were HQLA, high quality liquid assets that’s technical definition. In fact on entire book, 99% of the munis that we own are HQLA. So on the purchases, again, 70% of that 723 million were the munis that are AA plus or higher. So the yields on that tax equivalent yields are 412. On the corporates, that's 30%. We were buying the G-SIB banks, think of Truist, JPMorgan, Bank of America, Morgan Stanley.
The reason I bring those is that those are rated split rated. Single A, high BBB. The yield on that 432 and you blend it all in tax 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 points. We can always go to the discount window, the BIC. 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.
And kind of along the same lines, how do you plan to fund the PPP program?
So initially, the loan 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 problems whatsoever funding the draws of that money out as we have to continue to fund the balance sheet. So it's a pretty straightforward process. Randy and his comments talked about our liquidity. And so I've mentioned earlier that deposits are now outpacing loan growth. So we will absolutely have no problem funding those.
Last question from me, State Bank of Arizona got the systems integrated. Just curious how much of the synergies from that deal are already in the run-rate? How much, realizing have you identified any additional strategies that you're going through?
I mean we just did it this quarter. So I think there's 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 on a pretty good run rate.
So not much is going to realize to-date.
No, because a lot of those changes, we converted at the end of February. And 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'll see more of that.
Thank you. And our next question comes from line of Tim Coffey from Janney. You may begin.
I was wondering with the list of loans you have put under enhanced monitoring. Have you seen any deterioration in those credits in the last 30-45 days?
No, Tim. I think it's a little too early to tell. We haven't seen any deterioration as of yet.
Given that you have been through this cycle before. What makes this one different than the one that we saw between '08 and 2012?
Actually, this is the fifth cycle actually. I swear I’d never be here for another one. But the big difference is the background the reason for it. The 2008 to 2010 was all single family residential acquisition and development lending that was predicated on to a certain amount of speculation, minimal if no underwriting no docs. And based on the premise that all of the loans would be securitized and sold in the secondary market, sort of where they were at and things that were caught with the volume on their books primarily. For us it was single family residential construction 750 million, close to 450 million in acquisition and development.
So different product types are impacted, to say that this time around we just don't have those concentration levels and those product types. So it took a lot longer. I think it took a lot longer from 2008 to 2010 to work our way out of those product types. We have negative loan growth for almost five years as we downsize the portfolio, rebalance the balance sheet and basically work 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 long way as the recession that was generated by downturn in single family residential. As soon as 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 ability to help those borrowers that are impacted, at least on a short-term basis by extending payments, generating additional funds for operating costs 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, if there's 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 things that we've always done. So it's going to be a different environment at this time around.
And then kind of follow up question would be , is the liquidity of your current borrower different than it was in the last cycle?
Yes, 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 level. They're adjusting staff accordingly. There's some hotels have opted to close operations internally during the transition. So, they're reserving as much fast as they can. And in a lot of cases where we have deferred payments, some of the borrowers that we were in that type of circumstance, we could defer a principal and interest rate, just stopped it 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.
And Tim, we made the point early on that coming into this pandemic, the portfolio and the borrowers were, if you look it by the numbers are among the strongest in the company's history in terms of their shape. So a number of good years leading up to this relatively conservative that individual customer balance sheet management, so we come into it very well positioned.
Yes, just one thing I'd like to add. In the 2008 -- 2005, 2012, basically '12, it was a four year recovery. The regulatory environment was a little bit different that it was predicated on asset base, you have assets we were getting the Jingle mail a lot of foreclosures. The losses were just straight forward. You get a home back, you'd get it appraised, you'd sell it and you take your loss. Where in this case it’s going to be more on the operating and not so much on the collateral and it's going to be ensuring that these businesses get back up and running start generating revenues and profits.
And so the regulatory environment and looking at this portfolio I think is going to be a little more conducive to working with borrowers than previously where it was truly got the asset back, you'd have liquidated and take your loss. In this case, I think they've already come out with guidelines that said, work with the borrowers. We understand where you're at. This has been once in a generation type event. So I think that's going to bode well for us as we move forward.
And then in order to kind of execute on that Nike swoosh type of recovery, it’s something you’re somewhat dependent on the rest of the country to open. I mean, if Montana can 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?
Yes. 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've tried to lay out, which is we see things getting better. It's just going to take time and we're not expecting a big surge. It's just a longer slow back to normal pace.
Thank you. And our next question comes from the line of Jackie Bohlen from KBW. You may begin.
Just another quick follow up question on the change in the unfunded commitments. Was that the change that related to the historical loss? Was any of that impacted by the application of CECL?
No, it had to do with really the change in the economic forecasts, which shifted more towards different segments of the portfolio.
And then I realized 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 acquisition?
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, we see that where we are right now we shouldn’t see that again that should stabilize. So that's kind of the delta.
And then so it sounds like other line item variances and they're just kind of normal course of business?
Yes.
And I just wanted to clarify. Did you to do one conversion during the quarter or two?
Just one. So we closed State Bank of Arizona in the first quarter and also converted it.
And I apologize that I somehow missed this. When did the Heritage acquisition closed, because I have to 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?
Yes, we shifted things around. So your recollection is correct in that we decided to kind of substitute the spot we have 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 Bank of Arizona customer in a Foothills branch and et cetera and the opposite. So we wanted to get that converted. So we were on one system. And so we did shift that. We're going to convert Heritage in June, so that's the next one.
And just in terms of cost savings related to Heritage. Are there still -- obviously a little bit surrounding a conversion. But is it anything meaningful that are come out or have you already realized a lot of those?
Well, let's start with Heritage. When we acquired it, it was running at a sub-40 efficiency ratio. So highly, highly efficient. We didn't model and a lot of saves there. And I think until we get through the conversion, what we did have in there, which was pretty minimal and we’ll really start to will start to come through but that's very, very efficient bank. And so our modeling on that was pretty minimal expense save on top of how they were already running.
Thank you. And our next question will come from line of Michael Young from SunTrust Robinson. You may begin.
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%?
Yes, that is. We've also got more tax credits coming on from the investments we did last year, low income housing tax credits that will start to show up as well.
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 lasts through more of the busy travel tourism season into kind of June, July, August?
Yes, I think you have exactly right. It hit at a time when lot of places this is their slowest -- this is the slowest part of their year. So yes, it's all about getting back in business for the summer.
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. So it sounds like there's 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?
I think the governor has done a terrific job here. And I think that people are behind the plan and we've got a good plan for a staged reopening. And I haven't heard or seen lot of 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, 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's 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.
Thank you. And I'm not showing any questions at this time.
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.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.