Glacier Bancorp, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Glacier Blancorp third quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, press star then 0 to reach an operator. I would now like to hand the call over to Randy Chesler, President and CEO of Glacier Bancorp. Please go ahead.

All right. Thank you, Michelle, and good morning, and thank you for joining us today. With me here in Kalispell this morning is Ron Cofer, our Chief Financial Officer, Angela Dosey, our Chief Accounting Officer, Byron Pollin, 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. 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 16 bank presidents and their teams for their commitment and leadership and their service to their communities that they have demonstrated this year. Despite the pandemic, we are amazed at how well our customers have adjusted to the circumstances and are carrying on with business. Our 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. 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 42% or 24% increase from the prior year third quarter. Net income was $77.8 million, which is an increase of $26.2 million or 51% from the prior year third quarter. Highlighting the company's core earnings strength, the pre-tax, pre-provision net revenue for the quarter was $99.4 million, which was up 56 percent from the prior year third quarter. Core deposits increased $868 million or 6.5 percent over the prior quarter with non-interest bearing deposit growth of $436 million or 8.6 percent. Non-interest bearing deposits were 39 percent of total core deposits at the end of this quarter compared to 35% at the quarter a year ago. Deposits continue to flow onto the balance sheet as a result of customers' reduced spending and unprecedented government fiscal stimulus and monetary policy. We're pleased to see our cost of core deposits decline 11 basis points from 14 in the prior quarter to 21 in the third quarter a year ago. Total debt securities increased $582 million or 16% during the quarter and increased $1.6 billion or 60% 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 2.72%. down 45 basis points from the prior quarter due to purchasing new securities at current lower market rates. That security income was $25 million, which was materially unchanged from the prior quarter and an increase of 19% 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 short average life while maintaining higher levels of liquidity. The loan portfolio organically increased 165 million or 1% 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 16,000 Triple P loans for $1.472 billion. As part of this effort, we acquired over 3,000 new customers who received Triple P loans from us, totaling close to $298 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 $36.1 million in net deferred fees remaining on these PPP loans. Net income was $151 million, which was an increase of 3.2%, or 2% over the prior quarter and increased 20 million or 15% from the prior year third quarter. 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 them 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 a longer period of time. Net interest margin was tough to hold onto due primarily to the interest rate environment as we saw margin drop again this quarter to 3.92% from 4.12% last quarter. Pricing on new production during the quarter was around 4.30% versus our portfolio rate of 4.54%. The second quarter's new loan production yield averaged around 4.4. The core net interest margin ended the quarter at 4.02 versus 4.21 in the prior quarter and 4.35 a year ago. The pace of Triple P 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 242 loans for $8 million. 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. Non-interest income was once again driven by record mortgage production. We booked gain on sale of loans of $35.5 million, which was almost $10 million over the prior quarter, and an increase of $25 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 uptake in the number of out-of-state buyers, accounting for 26% of purchases, and 31% of construction loans in the third quarter. Credit performance was better than expected, with net charge-offs at $826,000 compared to $1.2 million last quarter. The Lincoln loans were 15 basis point of loans versus 22 last quarter and 31 a year ago. Non-performing assets decreased slightly by about $1 million and were 25 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 PPP loans, our MPAs would be 27 basis points of assets, which was a three basis point decrease from the prior quarter. During the second quarter, we made over 3,000 loan modifications in response to COVID concerns on loans totaling over $1.5 billion, representing about 15% of the loan portfolio, excluding Triple P loans. 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 $1.049 billion to $466 million, or 4.6% of the total portfolio. $105 million of these modifications were loans that re-deferred and extended their original deferral period for a re-deferral rate of about 9%. with no one industry accounting for more than 20%. We continue our enhanced monitoring of industries that we think pose higher risk due to the pandemic. The total amount of loans under enhanced monitoring is $617 million, or 6% of our total loan portfolio. This includes loans to hotel, motels, restaurants, travel tourism businesses, gaming businesses, and oil and gas industry-related businesses. We ended the second quarter with $400 million of these loans in modification status and ended the third quarter with only $77 million in modification, a reduction of $323 million, or 81%. Despite the steep reduction we saw in 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. Customers with loans totaling $237 million took advantage of this program in the quarter. Funding for this program was part of the federal government's CARES Act. Credit loss expense of $2.9 million for the quarter brings us to $39.2 million for the year. Our allowance for credit loss stands at $164 million, or 1.42% of loans. 1.62% of loans, not including PPP loans, which are 100% guaranteed. We believe this is a very adequate and prudent level given the uncertain circumstances caused by the impact of COVID and the uncertain political circumstances. Total non-interest expense was $106 million, which increased 7.5 million or 8% over the prior quarter and decreased 5 million or 5% over the quarter a year ago. For the quarter, the efficiency ratio was 49.16%, an improvement compared to the prior quarter efficiency ratio of 49.29%. On a year-to-date basis, the company's efficiency ratio was 50.21%. Excluding the impact from the PPP loans, the efficiency ratio would have been 53.3%. The company's capital levels remain very strong, with CET1 estimated to end the quarter at 12.44% up compared to 12.35% at the end of the prior quarter and down slightly from 12.56% from the quarter a year ago. Tangible book value per share was 17.64% at the end of the third quarter and increased, from 17.08 at the end of the prior quarter and increased from 15.53 from the prior year's third quarter. Our access to liquidity remains robust with the growth due to an increase in quarter deposits and borrowing capacity. At the end of the third quarter, the company had access to over $12 billion in liquidity. This includes $5.9 billion of unused capacity with $2.6 billion at the Federal Home Loan Bank, $2.7 billion of borrowing capacity at the Federal Reserve Discount Window and Triple P Liquidity Facility, and $600 million of capacity at correspondent banks. In addition to $2.1 billion in unpledged marketable securities and cash of $769 million. An additional $3.5 billion in liquidity is available from other sources, including broker deposits, over-pledged securities, and loans eligible for pledging at the Federal Home Loan Bank. And in December, we declared our 142nd consecutive dividend of $0.30 a share, an increase of $0.01 per share, or 3.4%. dividends have been and remain one of our preferred excess capital management strategies. So overall, the third quarter was another outstanding performance from the Glacier team. And Michelle, that ends my formal remarks, and I'd now like you to please open the line for any questions that our analysts may have.

Ladies and gentlemen, to ask a question, please press star, then 1. If you'd like to remove yourself from the queue, please press the pound key. Our first question comes from Jeff Rulis of DA Davidson. Your line is open.

Good morning.

Good morning, Jeff. Randy, maybe I'd just follow up on the last bit there. Clearly a unique year and Certainly M&A is quiet for the time being, or maybe not. But looking at the dividend, last couple years you've put out a special in the fourth quarter. So, again, a different year. But any thoughts of entertaining that and noting the penny increase to the regular dividend? Thoughts on the special and any sort of M&A that could be percolating?

Sure. So the special, it's early. That's always 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 decision. review decision that will certainly take place at the end of the year, but difficult to tell, and especially this year, Jeff, with so much uncertainty. We'll just have to see at that time. We were pleased to increase the dividend a penny a share to 3.4%, 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 the pause button was hit earlier this year across the board. I think that we're beginning to reopen dialogue with a number of interested folks and We are hopeful that in the beginning, kind of middle of next year, we'll 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 those conversations are beginning to reopen, and we'll see where they lead us. 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.

Okay. And a question on the mortgage side. The MBA forecast has got volumes down maybe 20%-ish next year. Any reason to think that your experience will be any different in 21? It seems like pretty good demand. It's a different dynamic in your footprint. Just thoughts on the mortgage outlook next year.

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 in-migration, and to the extent that rates stay low and that in-migration continues, we'll probably not be immune to a little drop-off, but I would expect us not to be as much as the national average. Okay. Thanks. I'll step back. You're welcome.

Our next question comes from David Feaster of Raymond James. Your line is open.

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? Do you plan to grant additional modifications under the CARES Act or probably address those issues head on and put those on non-accrual and TR and then maybe how does that translate into thoughts on the reserve? going forward.

Yeah, David, this is Tom. You know, I think, you know, every bank has kind of treated their modification approach a little bit differently. I would say 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 okay now, we would likely still grant a concession in my case. So, you know, I think it's a little early, as Randy said, just there's a lot of uncertainty, especially in the fourth quarter with, you know, some key events happening and, you 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 management process. Once we get past the end of the year, barring any type of extension of, you know, the CARES Act, you know, we may look at these a little bit differently from, you know, from a TDR designation as we would be required to by our regulators and our accountants. So, you know, 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. Okay. The thing I'll add, David, is that Tom and team and the chief and the credit officers in each division, you know, haven't stopped their staying portfolio grading and analysis. And so they're still proactively managing these as if, there were no modifications in place.

Okay. And then just, I want to get your thoughts on the margin. You guys have done a great job on deposit costs, despite the fact that 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, and lower reinvestment rates, just contemplating the you know, the earning asset remix and 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?

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, margins are going to drop across the industry. Lower for longer is something that is you can't defy gravity. However, on 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 NIN is through, in our view, growing your balance sheet and a strong balance sheet. Difficult to cut your way to success. we've got the engine and the markets that I think will position us very well to offset that lower for longer. But, Ron, did you have any comments on the NIM? Yeah, David, Ron here. So think about the fourth quarter. We're estimating PPP loan forgiveness could be as high as 30%. And so when you look back over the second quarter, the third quarter, the PPP loans, you know, being a drag, everybody recognizes that, that yield was about 260, 265. And so with 30% loan forgiveness, you know, our yield just on that could pick up to just under 6%. So that will influence the margin. But if we exclude PPP,

Just looking at the same trend that's happening with the core margin, you know, we back out discount accretion and the PPP.

That trend could certainly continue to occur, and especially if we do, as Randy was alluding to, you know, increase the balance sheet. Hopefully it's going to be loans, but to the extent, you know, the investments and the securities lower yielding, I think we picked up 90 basis points of 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 curve to steepen, but probably going to just continue. So, to Randy's point, we can't defy gravity. We're just pleased that we're starting higher than our peers, much higher.

Okay. That makes sense. And then, just, I want to go back to the 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, you know, 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? And within CRE, what segments are strongest? Just your thoughts on that.

This is Tom. I'll take that one. The way we're able to maintain our pricing advantages, 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 kind of the Tucson area and Arizona. But outside of that, you know, given the longstanding relationships we had, that's a benefit as well. And then just the overall market share allows us to hold that pricing a little bit. And in terms of growth, the growth 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 – you know, 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, as Randy alluded to in his opening remarks, the new customers we obtained through Triple P, which really was diversified across the footprint, was beneficial to us in the third quarter. So just as a some more color on that. Just with those 3,000 customers thus far, we've granted an additional $47 million in loans. So that was a pretty good portion of our third quarter growth as well.

How much penetration do you think you've gotten in that PPP, from those PPP borrowers, and how much do you think is left there?

I think there's more there. You know, I would say we've We're probably not even half of the way there, to be honest with you. So we've definitely got some upside there, and the division banks are doing a great job with their line staff, making sure that we're fostering those relationships to not only bring the rest of their credit relationships over, but also the rest of the deposit relationship as well. So we want to make sure that we're their primary bank, and I think we still have a ways to go on it. Okay.

All right. That's helpful. Thanks. You're welcome.

Our next question comes from Matthew Clark of Piper Sandler. Your line is open. Hey, good morning, everyone.

Morning. 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?

You know, well, I believe it was pretty consistent, but I want to double-check to make sure, Matthew. Okay. Yeah, it's very – I'm pretty safe to say it's pretty consistent to the prior quarter. We sold most of our production.

Okay. And then on expenses, up a little bit here, even adjusting for the FAS-91 – How much of that expense run rate is mortgage-related? And of that mortgage expense, how much is fixed versus variable? So that would help us kind of model going forward.

Yeah, Matthew. Ron here. So on the fixed versus variable on the mortgage, I would say that no more than 25% of it is variable tied to the production levels. And then... The other expenses, you know, you backed out the $1.9 million. But just to get to the point, the run rate for the fourth quarter, just say it would be $102 to $103 million for the run rate.

Okay. Okay. And then I guess along those lines, those third-party expenses, consulting expenses. Is that 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 that truly one time?

Yeah, it largely is one time. The bulk of that $1.9 million was we engaged with third parties 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 $6 million to $8 million over that time period. That's 20 quarters. So it'll ramp up. So just thinking even for the fourth quarter, it could be a $400,000 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 times we use third parties. But the magnitude of that 1.9, it will be much lower. 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.

OK. And then do you happen to have the average PPP loan balance in the quarter?

Yes. Just a second here, Matt. We've got the charts there. I'm going to zoom that report you're looking at. Hang on, Matt.

No worries.

Why don't we get back to you just to make sure we give you the right number.

Okay. That's all for me. Thank you.

I mean, our average loan, it's going to come in pretty low because 60% of our loans are below the 150. So we'll get to the actual number, but 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 you.

Our next question comes from Jackie Bolin of KBW. Your line is open.

Hi. Good morning, everyone.

Good morning.

I wanted to dig into new customers a little bit more from both a mortgage perspective and up in fees and then also in loan growth. Just to clarify, you said that 26% of purchases and 31% of construction were from out of, well, I guess this isn't really new customers, but were from out-of-state borrowers? Okay. So my assumption with that is that none of that is PPP related. Is that true?

Well, these were all residential mortgage. So those were the figures on the residential mortgage. But to my understanding, understanding there was no relationship to PPP on those.

Okay. Okay. I mean, I figured it would be little, if any, but just wanted to clarify that. Okay. 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 or looking to move, and then you've also got this new customer base from new PPP borrowers, correct? That's right. 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 2021 are based on those two factors, both, you know, continued in-migration and, you know, maybe even second-home purchases? And then also, you know, you mentioned that you're not quite 50% of the way through converting over PPP customers.

Yeah. So we're still working on our 21 plan. But I would say those are two very important growth aspects. And so, you know, this quarter we saw on the commercial side about 20% of the growth was related to the new customers that we brought on through Triple P. That's got some limitation because you 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. Those people coming and buying homes, we think that that is, from outside the market, not something that's a flash in the pan. We think that's part of a longer-term trend in 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, you know, 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 markets that we're 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 in-migration and the growth of new, you know, from new customers that we brought in. will be an important part of, you know, our numbers next year. Just too early to tell exactly how much, though, Jackie.

Okay. And if I'm interpreting the comments related to balance sheet size 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 PPP and excluding accretable yield. The goal would be to keep that flat to up in 21 versus 20?

Yes.

Okay. Okay. Thank you.

Very good. You're welcome.

Again, to ask a question, please press star then 1. Our next question comes from Michael Young of Tourist Securities. Your line is open.

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

Yeah, no, I think messaging has 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 question. that will affect just our total franchise. And so 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 deposit cost. In terms of growth, I think the messaging 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 COVID issues. But we are interested in looking at good loans from good borrowers. And I think that 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 we've spent a lot of time earlier this year talking and training folks on how to successfully go after the 3,000 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, you know, we'll probably continue on those themes for the next quarter as well.

That's helpful. 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 a zero-rate environment, coming out of the last financial crisis for several years, you always maintain kind of a net interest margin of around 4%, excluding kind of the 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 five-year rate now that would potentially change that on a go-forward basis?

Yeah, Michael, Ron here. So if you think back over those time periods you were referencing, the 4% especially, you know, the loan book is the primary driver for our margin. And so, you know, we typically price off the FHLP five-year, and certainly, you know, that's pretty low, but, you know, we've been able to increase the spread. But just allow me, 20% of that book turns over. So, you know, we're slow, steady up. We're 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 at for this pandemic versus where we were during the Great Recession, it's different. You know, we had a higher, deeper curve compared to this flat line effectively that we have for now. And so that's The steepness of the curve, I should not even say steepness. How 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.

Okay. That makes sense. But it does sound like you've been able to get some higher spreads, so maybe there's some defense opportunity there more so than maybe what the curve would imply. Is that fair? Yeah.

Yeah, it really gets back to the relationship pricing. I hate to beat the drum over and over here, but for the bigger banks and the smaller markets, we're able to price the relationship. 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 us. Credit to our division. You know, the ability to hold those higher yields on those loans is just fantastic.

Okay, great. And just last one for me, and I apologize if this was asked and I missed it or if you already alluded to this, but just implications for the tax rate. If there is an increase in the tax rate to 28%, you know, you guys were a pretty low taxpayer before that. So if you could just talk about any... kind of what the gearing ratio would be to that increase in terms of your effective tax rate and then any DTL or DTA implications as well?

Yeah, on the DTL, we're just modeling out a tax rate to a federal of 28% versus the 21%. So the adjustment that would flow through just from repricing, if you may, revaluing the deferred tax asset, that could be as big as a $10 million favorable adjustment Again, this is the opposite of what we lived at the end of 17 when they lowered the rate. We had to write down the deferred tax asset, 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 we'll suffer the higher tax rate marginally. And then on the effective tax rate, I could see it going up to 23, no more than 24% if the federal rate goes to 28%. I'm more comfortable saying 23% up from the 19% we have right now. As you know, Michael, 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 oversupply or oversharing municipal securities in the investment portfolio. So we have a built-in kind of heads there. It's providing good returns today. It will get better if there's a tax rate change. So that's the other thing that we, in addition to the one-time adjustment, that we think we're pretty well, as well as you could be positioned for increasing taxes.

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

So we're very careful about the municipal securities that we do buy in terms of the types and location. We tend to pick what I call mission-critical UNI loans or investments, infrastructure, things that are supported. And Ron 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. Yeah, and that was the strong redemption, the panic in the market that hit about the third week of March, and we were able to come in and buy, you know, I can't remember the exact number, but just say 720 million was what we bought Seventy 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, so we were able to step it all in, including the corporates, speaking of corporates, the truest type banks. We were able to pick up a tax equivalent yield of $420,000. on that $723 million that we collectively put in in about a week. And then just on the muni loans, we still do see some demand, but munis, the municipalities, I think they're a bit reluctant right now to borrow. We know projects are being put on hold that we've expressed strong interest in, And so we still have about $600 million 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 slowing down.

Okay. Thanks. Appreciate it. Sure. You're welcome.

There are no further questions. I'd like to turn the call back over to Randy Chesler for the closing remarks.

Great. Well, we appreciate everybody spending time with us this morning and questions. And we wish, hope everyone, you know, stays, manages through this pandemic. And please stay safe. And we wish everyone a great, great weekend. And thank you for joining us. And, Michelle, thank you for helping us host this call.

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.