Banner (NASDAQ:BANR) Q1 2020 Earnings Call

0:01 Good day and welcome to the Banner Corporation's first quarter 2020 conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchstone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mark Grescovich, President and Chief Executive Officer. Please go ahead, sir.

0:38 Thank you, Rocco, and good morning, everyone. I would also like to welcome you to the first quarter 2020 earnings call for Banner Corporation. As is customary, joining me on the call today is Rick Barton, our Chief Credit Officer, Peter Conner, our Chief Financial Officer, Bill Rice, our Chief Commercial Credit Officer, and Rich Arnold, our Head of Investor Relations. Rich, would you please read our forward-looking safe harbor statement?

1:09 Sure, Mark. Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives, or goals for future operations, products, or services. and many more. and a recently filed Form 10-K for the year ended December 31st, 2019.

1:59 Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations.

2:12 Thank you, Rich. It has certainly been an interesting quarter and I hope you and your families are well as we all battle the COVID virus pandemic. Today we will cover four primary items with you. First, I will provide you high-level comments on the quarter. Second, I'll note the things Banner is currently doing to support all our stakeholders, including our Banner team, our clients, our communities, and our shareholders. Third, Rick Barton will provide comments on the current status of our loan portfolio and accommodations we have made to assist our clients. Finally, Peter Connor will provide more detail on our operating performance for the quarter and the build of our loan loss reserve associated with adopting CECL and taking into consideration the estimated credit impact of the pandemic.

3:10 I want to begin by thanking all of my 2,100 colleagues in our company that are working extremely hard to assist our clients and communities during these difficult times. Banner has lived our core values summed up as doing the right thing for 130 years. It is critically important that we continue to do the right thing for our clients, our communities, our colleagues, our company, and our shareholders to provide a consistent and reliable source of commerce and capital through all economic cycles and change events. I am pleased to report that is exactly what we are doing. I am very proud of the entire Banner team who are living our core values.

3:59 Now let me turn to an overview of the first quarter performance. As announced, Banner Corporation reported a net profit available to common shareholders of $16.9 million or 47 cents per diluted share for the quarter ended March 31st, 2020. This compared to a net profit to common shareholders of 95 cents per share for the first quarter of 2019 and 95 cents per share in the fourth quarter of 2019. This quarter's earnings were impacted by a number of items, including the adoption of CECL and the estimated impact of the pandemic on the economy and subsequently the increase in our loan loss reserve, along with a net change in the fair value of financial instruments.

4:51 Peter will discuss these items in more detail shortly. Directing your attention to pre-tax, pre-provision earnings and excluding the impact of merger and acquisition expenses, gains and losses on the sale of securities, and changes in the fair value of financial instruments, earnings were $48.9 million for the first quarter 2020 compared to $46.4 million in the first quarter of 2019, an increase of 5%. This measure, I believe, helps illustrate the core earnings power of Banner. First quarter 2020 revenue from core operations was $142.9 million compared to $134.2 million in the first quarter of 2019.

5:44 We benefited from a larger and improved earning asset mix, an in-interest margin that remained above 4%, and good mortgage banking fee revenue. Overall, including the higher loan loss provision, this resulted in a return on average assets of 0.54% for the first quarter of 2020. Once again, our core performance this quarter reflects continued execution on our super community bank strategy. That is, growing new client relationships, adding to our core funding position by growing core deposits, and promoting client loyalty and advocacy through our responsive service model. At that point, our core deposits increased 13% compared to March 31, 2019. Non-interest-bearing deposits increased 11.7% from one year ago and represent a stable 39% of total deposits.

6:45 Further, we continued our strong organic generation of new client relationships. Reflective of this solid performance, coupled with our strong tangible common equity ratio of 9.7%, we issued a dividend of 41 cents per share in the quarter. Also, in light of the uncertainty of the future economic climate, we have suspended our share repurchases. While we continue to monitor current conditions and the economic outlook, the company has not changed our policy of supporting our core dividend. While we have limited operations in our branches, our workforce has been mobilized with nearly 60% working effectively remotely and the remainder available for in-person meetings by appointment while others perform operational duties.

7:40 We are working our drive-throughs and making sure our ATMs remain accessible and functioning. We have also created special programs for our employees deemed worksite essential with premium pay and other benefits, and we are providing additional paid time off for exposure or sickness. To provide support for our clients, we have made available several assistance programs.

8:06 These include

8:08 waived penalties for early IRA distributions up to $100,000 and CD withdrawals up to $25,000 and increased daily limits on mobile checks, deposits, and ATM withdrawals. Further, through the first round of funding, Banner has provided SBA payroll protection funds totaling nearly $500 million for 1,345 businesses and provided deferred payments or waived interest on 2,415 loans totaling nearly $751 million as of April 24th. Finally, we have made significant contributions to local and regional nonprofits and provided initial support of $150,000 for emergency and basic needs in our footprint.

9:03 Let me now turn the call over to Rick to discuss trends in our loan portfolio and his comments on Banner's credit quality. Rick?

9:13 Thanks, Mark. For the past several years, this portion of our call began by noting that Banner's credit metrics were stable during the just-ended quarter, maintaining the moderate risk profile of the company's loan portfolio. We further stated that the company continued to be well positioned to deal with the next credit cycle, whatever form it might take. Those same statements could be repeated for our credit metrics at March 31st, 2020. However, making that statement now is akin to looking in a rear view mirror and ignoring that the current pandemic has been changing the economic and credit landscape at warp speed since the end of March.

9:59 With this thought in mind, My remarks this morning will talk about the position of our portfolio at the end of the first quarter of 2020 and then turn to information and observations on the impact of the pandemic on Banner's loan portfolio. It makes sense to touch on several of the company's credit metrics at quarter end to emphasize our position of strength going into this pandemic-driven credit cycle. Delinquent loans were 0.66% of total loans. The 25 basis point increase from the linked quarter is an early indicator of pandemic portfolio impact.

10:44 The company's level of adversely classified assets were up during the quarter, but remain well below historic norms and are modest when viewed in the context of Banner's capital positions. Nonperforming assets increased $5 million to $46 million during the quarter and are 0.36% of total assets. Nonperforming assets were split between nonperforming loans of $44 million and REO and other assets of $2 million. The increase in nonperforming loans is due to a single leveraged syndicated credit that was having financial difficulties that predate the pandemic. You will recall in the fourth quarter of last year, non-performing loans spiked as a result of a single agribusiness loan.

11:37 During the first quarter, good progress was made by our special assets group on this exposure, which is performing on an agreed-to workout plan. With Banner's adoption of CECL and the onset of the pandemic, the first quarter loss provision was $21.7 million. This provision was after loan charge-offs of $2 million and recoveries on charged-off loans of $2.4 million. The allowance for credit losses now stands at $130.4 million and is 1.41% of total loans. Coverage of non-performing loans remains significant at 299%. Additionally, under CECL, The reserve for unfunded loan commitments was $11.5 million.

12:30 In his remarks, Peter Connor will detail our thinking and assumptions in posting this first quarter provision in light of the pandemic. For the past 10 years, a company priority has been to remix its loan portfolio in support of a moderate risk profile. We believe this has been accomplished with the following points made in support of the remixing. Acquisition, development, and construction loans at March 31, 2020 are 13.2% of total loans. Residential construction and land loans are 7.3% of total loans. And as many of you will remember, this concentration alone was over 30% pre-Great Recession.

13:24 Multifamily exposure is 7% of total loans. Commercial business loans are 23.3% of the loan portfolio, not including owner-occupied real estate loans that are 11.6% of the loan portfolio. Our commercial business loans are diversified by industry, size, and geography. Shared national credits are just 2% of the total loan portfolio, with leveraged transactions being less than 1%. Agricultural loans are 3.7% of the portfolio. Consumer loans, including one to four family permanent loans, are 16.6% of the portfolio.

14:11 Investor commercial real estate loans are 28.1% of total loans, making it the portfolio's largest concentration. This portfolio also is diversified by industry, size, and geography with an average loan size of less than $750,000. Finally, single borrower exposure is diversified. The company's largest exposure is 3.75% of capital and the top 25 commitments are 59% of capital. Outstandings on these commitments is 39% of capital. A great deal of effort has been focused on building the company's credit culture.

15:00 This has been a cooperative effort between credit risk management and production lines of business with support from the top of the house and the board of directors. A laser focus has been maintained on good initial risk selection and our lending policy has remained unchanged as we chose not to relax our approach to underwriting during the long economic expansion. This should stand us in good stead as we deal with the realities of the pandemic. It also puts us in a position of continuing to meet the credit needs of our clients going forward. With the discussion of Banner's March 31 2020 portfolio position complete, the balance of my remarks will be on the pandemic realities.

15:53 Economic forecasts are beginning to capture the magnitude of the economic cycle we are facing. The initial impact of the cycle on our portfolio is reflected in this quarter's provision expense, and as Peter will discuss, provisioning in future quarters also is likely to be impacted. The impact on many of our clients has been swift and is reflected in the level of loan deferrals and modifications we have granted. As noted in our press release, first quarter modifications were made to 912 loans totaling $328 million. These numbers have continued to grow during the month of April and now stand at 2,415 loans and $751 million, which is 8.1% of the total loan portfolio.

16:48 Portfolio segments with significant modification activity are the following. Small business scored loans, $166 million. Hotel and motel loans, $123 million. Consumer loans, including one to four family mortgages, $91 million. restaurants, $71 million, retail commercial real estate, $79 million, and sports clubs and fitness centers, $50 million. The balance of the modifications are spread between larger C&I borrowers at $50 million and a variety of investor and owner-occupied commercial real estate property types.

17:38 The tenor of our modifications has been 90 days, and under regulatory guidance, they are not considered to be troubled debt restructures. Our exposures and portfolio segments with the highest immediate risk are the following. Hotel, $213 million. Restaurants, $163 million. Recreation and leisure, $90 million. healthcare practitioners, $124 million, healthcare facilities, $244 million, oil and gas exposure is nil on a direct basis with indirect exposure of less than $10 million, and our airline exposure is less than $10 million.

18:29 In order to better gauge portfolio issues, we are in the process under relationship by relationship review of our loan portfolio. This will give us a good baseline to help manage our loan portfolio generally and problem credits individually through the duration of the pandemic. We are committed to assist clients in a safe and sound manner as they deal with how the pandemic is impacting their businesses. In addition to the modifications just discussed, Mark outlined our participation in the Payroll Protection Program, and we are assessing our participation in the upcoming Main Street Lending Initiative. And we are looking for other actions that we can take to help our clients survive this unprecedented credit cycle.

19:23 And finally, We are fortunate to operate in geographies that were outperforming the national economy pre-pandemic and that are home to many exceptional companies and research universities. These footprint demographics when combined with our strong credit metrics, loan portfolio diversification, and capital structure will serve us well as we work with our clients through this period of economic uncertainty. With that, I will turn the microphone over to Peter Conner for his comments.

19:57 Peter. Thank you, Rick. And good morning, everybody. As discussed previously and as announced in our earnings release, we reported net income of $16.9 million or $0.47 per diluted share for the first quarter compared to $33.7 million or $0.95 per diluted share in the prior quarter. While core revenue increased $3.2 million from the fourth quarter First quarter earnings were negatively impacted by the elevated CECL loan loss provision that contemplates deteriorating economic conditions in future periods. I'd like to make a few comments about our approach to the inaugural CECL reserve in the first quarter. Total reserves, including the allowance for credit losses and reserves for unfunded loan commitments, increased 38.7 million from the fourth quarter to 142 million including the day one adoption of CECL and the day two provision for the first quarter.

20:58 The historical loss or quantitative component of our reserve model uses 12 years of actual loss history back to the first quarter of 2008 and incorporates the losses experienced during the Great Recession. Our economic forecast assumption contemplated negative GDP growth in the 18 to 20% range and unemployment peaking at 9% in the second quarter, then remaining in the 6% to 7% range into 2021. The qualitative adjustment component reflects management judgments and conditions unique to our markets and portfolio. Since quarter end, when we established the reserve, the economic outlook has deteriorated. However, the offsetting risk transfer effect of the fiscal stimulus provided by government loan programs that Banner is participating in are yet to be known, nor is the pace and timing of reopening of the economy.

21:57 Banner has used a prudent reserving methodology since the Great Recession, and we believe that we continue this practice in the first quarter based on the facts and circumstances that existed at quarter end, and we will continue to do so going forward. Turning to EPS. The $0.48 decline in per share earnings from the prior quarter was primarily the result of the increase in loan loss provision expense and reduction in the value of financial instruments carried at fair value. Total loans increased $48 million from the prior quarter end as a result of increased refinance-driven prepayments on 1-4 first lien mortgage loans, lower construction loan outstandings, along with a decline in held-for-sale loan outstandings.

22:46 We did not experience any material change in overall credit line usage as of the end of the first quarter. Organic portfolio loan growth, excluding held for sale loans, declined $19.6 million. Held for sale loans declined by $28 million as bulk sales out of the multifamily portfolio exceeded production for the quarter. Excluding the Alta Pacific acquisition, loans held for portfolio grew by 3% over the prior year quarter. Ending core deposits increased $355 million from prior quarter end due to organic new account growth and general increases in average account balances as customer liquidity increased heading into the pandemic. Excluding the Alta Pacific acquisition, core deposits grew 9.3% over the prior year quarter.

23:38 Time deposits increased by $46 million due to an increase in brokered CDs while retail CDs remained flat. FHLB borrowings declined $203 million as a result of core deposit growth. Net interest income remained even with the fourth quarter at $119 million as growth in average earning assets offset a small decline in net interest margin. Compared to the prior quarter, loan yields decreased 10 basis points, principally due to an overall decline in the yield curve. The average loan coupon declined seven basis points, which was partially offset by an increase in accretion-related interest income of two basis points and a decrease in deferred loan origination, prepayment, and interest penalty-related fees totaling five basis points.

24:27 Total cost of funds declined six basis points to 46 basis points as a result of lower deposit costs and wholesale funding costs. The cost of deposits declined from 40 basis points to 35 in the first quarter due to declines in retail deposit costs. Brokered CDs accounted for four basis points of the total deposit cost, one basis point lower than the prior quarter. Composition of non-interest bearing deposits to total deposits held steady at 39% of total deposits and the ratio of core deposits to total deposits held steady at 89% in the first quarter. The net interest margin declined modestly by one basis point to 4.19%, as the decline in funding costs kept pace with the decline in earning asset yields.

25:17 An improvement in securities yields due to purchases of muni securities at distressed prices in March, along with slower prepayment speeds on MBS securities, helped offset the impact of the decline in loan yields. Loan accretion contributed 10 basis points to the margin in the first quarter, up two basis points from the eight basis points loan accretion contributed to the margin in the fourth quarter. The bank continued to adjust deposit rates down during the quarter and into April, and we anticipate seeing a continued decline in average deposit costs carry through into the second quarter. Total non-interest income declined by 1.1 million from the prior quarter. The results this quarter included a loss of $4.6 million on fair value adjustments on securities held for trading in the investment portfolio due to higher credit spreads.

26:08 Non-interest income excluding losses on the sales of and changes in securities carried at fair value increased $3.4 million. Deposit fees increased $166,000 due to additional volume from the AltaPacific acquisition in mid-fourth quarter. Total mortgage banking income increased significantly by $3.9 million due primarily to an increase in residential mortgage gain on sale spreads on high refinance volume demand. Within this line item, multifamily loan gain on sale income was down $669,000 from the fourth quarter due to losses on the held for sale interest rate hedge due to the decline in market rates and the slowdown in new loan production. and the near-term multifamily loan production will remain muted as secondary market buyer demand has softened with the pandemic.

27:01 Miscellaneous fee income decreased $562,000 due principally to lower SBA and swap income. Turning to non-interest expense, total non-interest expense increased by 1.5 million from the prior quarter, excluding acquisition costs and pandemic-specific operating costs. core non-interest expense increased 4.5 million. Compensation expense increased 2.9 million due to a combination of higher payroll taxes normally experienced this time of year, along with higher medical claims expense in the first quarter, following an accrual release in the fourth quarter. While we did not see COVID-19 specific related medical claims in the first quarter, we did experience an increase in routine medical claims in advance of the stay at home orders.

27:51 The credit for capitalized loan origination costs declined by $3 million in the first quarter due to a substantial decline in new loan production. Provision expense for unfunded loan commitments increased $1.7 million as a result of the Day 2 CECL required reserve model as applied to undrawn loan commitments. The increase was proportionate to the change in the increase in the reserve for the allowance for credit losses discussed previously. Other expenses generally declined in the first quarter as a result of lower client transaction activity, employee travel and conference, and facility costs, all driven by the stay-at-home orders in effect across Banner's footprint. The AltaPacific systems conversion, facilities closures, and operational integration were successfully completed in February, and we remain on track to achieve the expense synergies contemplated in the pro forma when the acquisition was announced.

28:49 Our ongoing delivery platform efficiency improvement initiatives have been suspended during this period and will be resumed once the company returns to a normal operational footing. We are tracking pandemic specific operating costs, including COVID-19 specific items such as employee salary premiums, overtime, benefits and medical claims, customer communications, facility sanitization, cash and courier rooms, supplies, and certain IT costs enabling a remote work environment. We anticipate the increase from these pandemic specific costs will be less than the offsetting reduction in normal operating costs we would have typically incurred over the same period for conferences and travel, marketing, and branch transaction-driven costs.

29:37 This concludes my prepared remarks. Mark?

29:41 Thank you, Peter and Rick, for your comments. That concludes our prepared remarks, and Rocco, we will now open the call and welcome your questions. Absolutely. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. To answer your question, please press star then 2. Today's first question comes from Jackie Bowen with KBW. Please go ahead.

30:12 Hi. Good morning, everyone.

30:14 Good morning, Jackie.

30:17 I wanted to dig into mortgage banking first, just given the meaningful increase quarter on quarter. Peter, that was helpful to know the multifamily impact on a linked quarter basis. Do you have the dollar value of its contribution to fee income this

30:32 quarter? Hi, Jackie. It's Peter. Yeah, it was about $400,000 for the quarter, so it's a bit lower than it has been, as I described earlier. in my prepared remarks, most of that, well, it was due to two pieces. It was due to the decline in the hedge that we put on the pipeline prior to selling the loans. And then two, production for the quarter was lower than we normally experienced in part due to the first quarter. And then as the pandemic began to emerge, that also negatively affected production and multifamily.

31:07 Okay. And it sounds like that, you know, production and those trends are are likely to continue in the near term for that specific piece of it?

31:16 Yeah, that's correct. We've pulled back on production and increased pricing in anticipation of a slowdown in the demand in our secondary buyer universe of other banks. So we've preemptively slowed down production going forward.

31:33 Okay, that's helpful. Thank you. and then turning to the single family piece of it, I'm just doing some basic head math so I'm going to be off a little bit here but it looks like the single family piece almost doubled this quarter in terms of gains. Was that all due to gain on sale margin or was there higher volume as well

31:53 in the quarter? It was due to margin. We were actually down in terms of production a little over 10% from the fourth quarter. The mix in terms of refinance and purchase continued to increase towards the refinance side. It was about 50-50 refinance purchase in the first quarter. And we experienced such a high demand of refinance volume that we were able to increase pricing and generate a higher gain on sale this quarter, well above what we normally experienced. The gain on sale is a bit over 4%. on a net basis for the quarter. So all of that increase was driven by higher gain on sale.

32:36 Okay. And do you have what it was for the fourth quarter?

32:41 I'm sorry, what was the question?

32:43 What the gain on sale was for the fourth quarter, just so I can compare the two.

32:47 Yeah, it was running in the mid 2% range in terms of gain on sale percentage.

32:53 Okay. And how are you looking to this line item in the current quarter. I know refi volume is likely to continue to be strong, but given the stay-at-home orders, I would suspect that purchases are down significantly.

33:09 Yeah, and so far the evidence is that, at least in the first part of this quarter, the pipelines are holding up well, although we're not through the quarter yet. So we haven't seen a diminishment of demand or volume coming in. So far, I would anticipate we'll see a somewhat lower spread on loans, a gain-on-sale spread in the second quarter, all things equal. So, you know, I anticipate a decline in the gain-on-sale income number in Q2. But we continue to see strong refinance volume. And then, as you know, normally we see some seasonal increase due to weather in the second and third quarter. So that's a bit of an offset to, you know, what we normally see in terms of a slowdown in refinance volume.

33:55 So I'd I think right now we see studies should go in terms of production for the second quarter, albeit at a lower gain on sales.

34:04 Okay, so that line item probably from a single family perspective probably winds up somewhere between 4Q and 1Q?

34:11 Yeah, that's fair.

34:13 Okay. Okay. And then just one last one and I'll step back. You mentioned the conversion was done in February. How much of the cost, Dave, have you realized for Multipacific to date?

34:25 So through, yes, so through, we would have recognized 100% of them by the end of the first quarter. So we really are effectively done with the cost. You know, any remaining cost saves really are de minimis at this point. So what we'd see in the second quarter is a full amount of the synergy that we contemplated when we announced the transaction back in July 25th of 2019. Okay, great. Thank you. I'll step back.

34:54 Thank you, Jackie. Our next question today comes from Gordon McCurry of Stevens, Inc. Please go ahead.

35:03 Good morning. Good morning, Gordon. Mark, I guess, could you provide an updated expectations for how you're thinking about net growth this year and origination activity? And I guess, Peter, how would that origination activity translate into the Capitalized Origination Costs in the Salaries Expense Line.

35:30 Yeah, Gordon, this is Mark. I'll take the first part of that question. I think, you know, we had initiated some, our thoughts that we would see some mid-single digit growth in the loan book. I think it's, as we suspect now, we're looking at it and suggesting that the capital spending is not going to occur until the latter half of the year. And you're going to start to see some businesses will certainly draw down some of their working capital facilities as the economy begins to rebound. But we're not anticipating that until later in the year. And the continued low interest rate environment is going to lead to additional refinancing, specifically in the one to four family books.

36:17 So I think you can view our look at the overall loan growth as being flat. Peter, do you want to comment on the... Yeah, hi, Gordon.

36:31 It's Peter. Yeah, in terms of the deferred loan origination expense, I think we'll see some modest increase in that credit to compensation expense going into Q2 and Q3. We typically have a fairly low seasonal... loan production in the first quarter, just naturally based on our business model. But as Mark highlighted, we're expecting a lower pace of production this year given the pandemic. So you've got to kind of balance that into what we normally see as an increase in loan production in the second quarter will be muted because of the pandemic. But I'd guide to a modest increase in that line item going into Q2. The other wild card is the SBA PPP program, right?

37:18 That too has some modest amount of loan origination offset, but that's yet to be determined based on the quantity we end up doing in the second quarter. I appreciate that.

37:32 Speaking of the PPP program, do you have an estimate of what the blended fee rate could be?

37:40 Yeah, this is Peter. So today, based on what we've announced in terms of the first tranche of production, the average weighted loan processing fee was right at 3%. But that had a higher weighting of larger loans that were front-loaded in some ways in the first round of production. And we expect that as we go forward, that average loan size will decline and the fee will go up. So I think we're going to be closer to 3.5%. as opposed to three by the time the second quarter ends.

38:12 Okay. And then how many loans did you have in the pipeline pending approval and just what's the pipeline for round two? How is that looking?

38:25 Yes, Gordon. So we had north of 5,000 inquiries coming into the overall program. and you saw the numbers that we put in the deck as to what we did through the initial phase, which was 1,345 businesses receiving $448 million in funding. I obviously would anticipate that those numbers are a bit larger in terms of applications approved by the bank and waiting eTRAN approval by the SBA. So, you know, provided that we can get the E-Tran system up and running effectively for the bank, you know, as they go through the approval process, you could see that number looking very similar, provided there's enough funds and the SBA can process them.

39:19 And again, the numbers I gave you in terms of earning asset growth or loan growth are without this particular program. So... net of this program, which obviously will inflate the balance sheet. Peter, do you have any additional remarks to that?

39:35 No, I think you covered it well, Mark.

39:38 Thanks for clarifying that last point. And how do you expect to fund these balances? Are you bringing deposits in, or do you expect to use PPLF or FHLB? How is the balance sheet supposed to be funded for these? Peter, you want to?

39:55 Yes, yeah, thanks, Mark. Yeah, Gordon, we're going to fund them with the PPP lending facility from the Fed, which, as you know, is 35 basis points, but that also is required in order to get any regulatory capital relief as well. So our plan at this juncture is to fund the entirety of the PPP loan balance with that Fed facility.

40:18 Okay, I'll step back. Thank you. Thank you, Gordon. Our next question today comes from David Feaster with Raymond James. Please go ahead.

40:28 Hey, good morning, everybody.

40:30 Morning, David.

40:32 I just kind of wanted to follow up on the PPP question. Are you primarily just focused on existing customers or using this as an opportunity to expand relationships? And are you able to even ask for more full deposit relationship as you're supporting your client base?

40:52 Mark Grescovich, Robert Butterfield, Sherrey Luetjen, Cynthia Purcell, James McLean, Scott Newman Thank you very much. as strongly as we are with our staffs trying to process these to help the businesses and the communities in which we all operate.

41:59 So our approach to this is one of folks coming in that if they qualify and they fill out an application and they get in the queue, we're going to service them. Okay.

42:14 That's helpful. And then just on deposits generally, you guys have done a tremendous job growing low-cost core deposits. I guess just given all the stimulus thrown at the market and the treasury actions and everything, how do you think about core deposit growth going forward? And maybe in light of a flat loan growth environment, how do you plan on using excess liquidity? Hi, David.

42:42 Yeah, so we, you're correct, we've seen an increase in, you know, account level and client liquidity and deposit accounts. And we are seeing some inflows from the PPP program as well going into deposit accounts as those ones get funded. So we think this increase in liquidity is really bifurcated into two components. There's a piece that's going to go back out off balance sheet in the next quarter or two. Funding proceeds or use of proceeds from the PPP program will go back off balance sheet. And then we think there's a component here that's going to be more sticky. It'll hang around for a while, this increased liquidity.

43:27 So we are going to invest it, but on a duration-weighted basis to basically take advantage of the short-term liquidity but not creating excessive liquidity risk for the company and creating a lot of excess duration with this newfound liquidity over the long run. So it's a blend of investments, both short, medium, and long based on where we believe the duration of these deposits will go ultimately.

43:56 Okay. And then I guess ultimately, how do you think about the core NIM in light of all that going forward just, you know, How do you think about that? And then also any thoughts on accretion going forward under Cecil? Thanks.

44:12 Yeah, so our margin of 4.19 for the quarter was good. It was also, we had a good quarter of a loan accretion. It was up a couple of basis points from the prior quarter. Accretion was a bit lumpy, but we anticipate that loan accretion component to gradually decline quarter to quarter, so we're not going to see The level of accretion support that we saw in the first quarter going forward, it'll drop a couple of basis points. We think, you know, one or two every quarter as we go forward. So you'll take that into account. And then, you know, we did look at the spot rate on our loan yields at March 31st. So we, you know, after the 150 basis point cut in Fed funds and prime, compared to the average loan yield that we reported in the quarter, which was 503.

45:03 We did see about a 25 basis point decline in the spot rate on loan yields at March 31st. So you can take that into account and then factor in a continuing decline in our funding costs. As I mentioned earlier, we continue to have a steady case of deposit rate reductions. along with a steady pace of lower wholesale funding costs to partially offset the decline in loan yields. I did mention in my prepared remarks our securities yields were up this quarter, partly due to a slower prepayment activity in RMBS, but also due to the fact that we purchased about $240 million of munis and high-rated corporates at very distressed prices in that third week of March when there was significant dislocation. in the markets. And so that basket of securities came on at about a 4% tax adjusted yield. So that'll create a little bit of support on the securities portfolio going forward. So all that being said, it's, you know, we don't provide guidance on the margin specifically. And in this quarter, you know, the PPP program is going to have another element of Thanks, everybody.

46:16 Thank you. Our next question comes from Andrew Leash with Piper Sandler. Please go ahead. Good morning, everyone.

46:50 Just kind of a follow-up question on the margin here. I know you guys have been putting loan floors, and that's been a focus for a while. What percentage of loans are at floors right now, and what percentage of the portfolio is tied to fixed rates?

47:08 Andrew, Peter, I'll start with the next question. So our loan repricing mix has remained relatively stable over time and it continues to be that way. About 40% of our loan book is fixed rate and the remaining 60% is basically split between adjustable loans of reprice between three months and five years and the rest of it's floating on prime or LIBOR. In terms of loan floors, we've got about $2.8 billion or so of loans that are either floating or adjustable with a floor. And as of today, about 70% of that book is at its floor or close to at its floor. And the remaining portion has still got some spread between its strike price and actual floor.

48:00 So there's some support there. but we'll continue to see some decline in floating rate loan yields as we go forward and we have instilled the discipline of floors and all new floating rate loan originations as a general rule unless they're exception approved. So there is some support there and I think the other point to make here is that over time there's a natural floor to loan pricing that the market will accept in terms of expected credit losses and loan origination expense that'll improve spreads over those indices over time. This is a natural market effect.

48:38 Gotcha. I agree. Thanks. That's very helpful. And then just on the expenses, not just expenses here, excluding some of the merger charges and some of the one-time COVID-19 expenses that you called out, it looked like the quarterly numbers around $94 million or so. I guess if the origination credit is a little bit larger number this quarter, you see expenses come down a little bit. Is a $93 million run rate the right level to be looking at going forward?

49:20 Yeah, part of that, as you point out, it's a relatively light quarter of loan origination credit to expense in the first quarter. As I mentioned earlier, I think that number is going to move up a bit here in the second quarter as loan production goes up relative to the first quarter. So you'll see some benefit there. We'll get some of the synergy benefits from AltaPacific showing up beginning in the second quarter. It's not a big acquisition, so I'm not going to say it's a big component, but we will see the full synergies of that integration begin in the second quarter. and then as I guided you earlier, our employee related costs for travel conferences and some other activities that would normally happen aren't happening because of the stay at home order. So we'll see some benefits there going forward. The other point I mentioned is that we, as we discussed previously, we have ongoing initiatives to improve the operating efficiency in our delivery platform, both the retail Branch Network and our commercial delivery platform and some automation initiatives that will improve efficiency. Those have been pushed back given the pandemic.

50:34 So while they're still active, they've been deferred during the pandemic. So the pace of our improving operating efficiency has been pushed out during the pandemic. So you want to take that into account as you think about the end of 2020 and 21 and beyond. We'll resurrect those projects, but right now they're on pause for about six months.

50:56 Gotcha. That's helpful. Thanks so much. I'll step back.

51:01 Thank you, Andrew. And our next question comes from Jeff Rulis with VA Davidson. Please go ahead.

51:08 Thanks. Good morning. Good morning, Jeff. A bunch of questions have been asked, but I guess on the PPP, do you have any sense for the the percent of those that you funded that would be included in the at-risk group in terms of those that you've identified which participated in the PPP as well.

51:37 I'll ask Rick to comment on that.

51:42 Good morning, Jeff. You know, we have not done the segment analysis yet. I was holding off on doing that until we get through the current round of funding so that we have a little more comprehensive view of how the money was used. I can say just from my review of the list that we have funded to date that it's spread throughout all sectors and it's not concentrated in any one of the segments that we've identified as high risk, with the possible exception that the word hotel pops up in the list quite frequently.

52:28 Okay. So equal share, you think if it was nine or 10% of the portfolio, that would be your best guess with a higher percentage of hotel?

52:38 That's where I would start from.

52:40 Yes, Jeff. Fair enough. Okay. Mark, I think I know the answer to this, but I'll ask it anyway. Just on the buyback and capital, just sort of revisit those thoughts. I know that we've got to stay prudent on how this plays out, but kind of the triggers on buyback, when that may be back in play, and just thoughts in capital in general. Appreciate it.

53:15 Thank you, Jeff. I think as indicated in my prepared remarks, we've obviously suspended any share repurchase just as other financial institutions have. There's still too much uncertainty as to how this is all going to play out over the course of the next 12 months, and we want to make sure that our capital position remains very strong and that we're supporting our clients through this so that's number one. The other thing as part of my prepared remarks is we evaluate all of our capital deployment all the time and on a quarterly basis we certainly as an institution look at our dividend policy and as identified in the first quarter we issued a 41 cent dividend.

54:04 A core dividend is certainly something that is top of mind for for the board and for the institution in terms of capital deployment. But first and foremost, obviously, it's going to be to support our clients through this. And as we've done in the past with share repurchase, we've been opportunistic as to when we would deploy that when we feel comfortable that we have good understanding as to what the economic profile of the country is going to be, and in particular, the bank's overall performance. risk appetite is going to be and risk component is going to be over the next several months. And right now it's just too early to tell.

54:43 I appreciate the color there. One last one for Rick. It sounded pretty positive on that kind of progressing well on that agribusiness credit. Is that classification possibly going to change out of non-accrual or, you know, given kind of the regulatory environment, could that be considered a TDR or how do you view that credit and its ultimate processing here as we go forward?

55:20 Okay. Well, as I said in my remarks, we're pleased with the progress that we have made to date, but These are just the first baby steps in what's going to be a long-term workout. And it's going to be probably at least a year before we could consider moving it out of non-accrual unless something really remarkable happens. If it was out of non-accrual today, for whatever reason, Thank you very much, Rick.

56:32 Forgetting what the piece was.

56:35 About 18 million. Got it.

56:40 Okay. Thank you. Thanks, Jeff. Ladies and gentlemen, as a reminder, please press stars and one if you have a question. And this concludes your question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

57:03 Thank you, Rocco. This is Mark Grescovich. As I stated, we're very proud of the Banner team as we continue to do the right thing as we battle this COVID pandemic.

57:15 Thank you for your interest in Banner and for joining our call today.

57:18 We look forward to reporting our results to you again in the future. Have a wonderful and safe day, everyone. Bye now. Thank you. This concludes today's conference call. You may now disconnect your lines and have a wonderful day.