Banner Corp
NASDAQ:BANR
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Banner Corp
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Good morning, and welcome to the Banner Corporation Third Quarter 2020 Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Mark Grescovich, President and CEO of Banner Corporation. Please go ahead.
Thank you, Kate, and good morning everyone. I would also like to welcome you to the third quarter 2020 earnings call for Banner Corporation. As is customary, joining me on the call today is Peter Conner, our Chief Financial Officer; Jill Rice, our Chief Commercial Credit Officer; and Rich Arnold, our Head of Investor Relations. Also in his final earnings call for Banner is Rick Barton, our Chief Credit Officer. Rick will be retiring at the end of the month after 18 years with Banner and a 48-year banking career.
Rich, would you please read our forward-looking Safe Harbor statement?
Sure, Mark. Good morning. Our presentation today discusses Banner's outlook, 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, forecast of financial or other performance measures and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question-and-answer period following management's discussion.
These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from our earnings press release that was released yesterday and the most recently filed Form 10-Q for the quarter ended June 30, 2020. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations. Mark?
Thank you, Rich. It has certainly been an interesting first nine months of 2020, and I hope you and your families are well as we all battle the COVID virus and its effects on our communities and the economy. Today, we will cover four primary items with you. First, I will provide you high-level comments on the quarter. Second, the actions Banner continues to take to support all of our stakeholders, including our Banner team, our clients, our communities and our shareholders. Third, Jill Rice will provide comments on the current status of our loan portfolio and accommodations we have made to assist our clients. And finally, Peter Conner will provide more detail on our operating performance for the quarter and the build of our loan loss reserve associated with the estimated economic impact of the COVID virus on our clients.
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 to 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'm pleased to report to you that is exactly what we continue to do. I'm very proud of the entire Banner team that are living our core values.
Now let me turn to an overview of the third quarter performance. As announced, Banner Corporation reported a net profit available to common shareholders of $36.5 million or $1.03 per diluted share for the quarter ended September 30, 2020. This compared to a net profit to common shareholders of $0.67 per share for the second quarter of 2020 and $1.15 per share in the third quarter of 2019. This quarter's earnings were impacted by the allowance of credit losses build based on the estimated impact of the COVID virus on the economy, our strategy to maintain a moderate risk profile and strong mortgage banking revenue. 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, COVID expenses, gains and losses on the sale of securities and changes in fair value of financial instruments, earnings were $57.8 million for the third quarter 2020 compared to $50.9 million in the third quarter of 2019, an increase of 13%. This measure I believe is helpful for illustrating the core earnings power of Banner. Third quarter 2020 revenue from core operations increased 8% to $148.6 million compared to $137.6 million in the third quarter of 2019. We benefited from a larger earning asset mix, a good net interest margin and strong mortgage banking fee revenue.
Overall, this resulted in a return on average assets of 1.01% for the third quarter of 2020. Once again, our core performance this quarter reflects continued execution on our super community bank strategy, even with the challenges of the pandemic, and that strategy 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.
To that point, our core deposits increased 33% compared to September 30, 2019. Non-interest bearing deposits increased 39% from one year ago and represents 44% of total deposits. Further, we continued our strong organic generation of new relationships again this quarter. Reflective of the solid performance coupled with our strong tangible common equity ratio, we issued a dividend of $0.41 per share in the quarter. 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, working out drive-throughs, ensuring our ATMs remain accessible and functioning, and others performing operational duties.
We have also created special programs for employees deemed worksite essential 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. Banner has provided SBA Payroll Protection funds totaling $1.15 billion for 9,103 clients and provided deferred payments or waived interest on 3,370 loans totaling $1.1 billion. Also, we have made an important $1.5 million commitment to support minority-owned businesses in our footprint, made significant contributions to local and regional non-profits and have provided financial support for emergency and basic needs in our footprint.
Let me now turn the call over to Rick and Jill to discuss trends in the loan portfolio and their comments on Banner's credit quality. Rick?
Thanks, Mark. Before I turn the microphone over to Jill Rice, I would like to thank all of you for your patience and courtesy over the past decade as I have answered or not answered your insightful questions. Also, I would like to acknowledge how our interactions have deepened and expanded my understanding of the equity markets in general and how each of you view the financial services sector. And lastly, I would like to thank each of you for your interest and support of Banner.
With that, I will pass the mic toward to Jill. As you work with her, I know you will recognize and appreciate her experience, intellect and candor as I have over the almost 19 years we have worked together. I can say without reservation that Banner's credit risk management and credit culture are in good hands. My best to all of you and your families and associates and stay safe as we continue to navigate the pandemic. Jill?
Thank you, Rick, and good morning. Before I review Banner's credit portfolio, I would just like to take a minute to thank Rick for everything that he has done to assist me in my career over these past 18 years. It seems impossible that it has been that long, but as I say time flies. Working alongside Rick over the last two decades has no doubt made me a better banker because he is certainly one of the best. I hope that it has made me a better person because while you all know Rick to be an excellent credit professional, I have to say that he is an even better human being, kind, generous and respectful to all. There is no doubt that he will be missed around here. Rick, I wish you and Georgette years of happiness and many great adventures in your retirement.
And now before I get choked up, let me review Banner's credit quality. For the past two quarters, we have noted that our credit metrics do not yet capture the changing economic and credit landscape. And that statement is no less true today. Our delinquency numbers are still being muted in part by payment deferrals provided to clients, who have been severely impacted by the economic shutdown and in part by the various fiscal stimulus programs.
Before I update the details regarding our payment deferrals, let me make a few comments to summarize our September 30 credit metrics. Banner's delinquent loans in the third quarter increased 2 basis points over the linked quarter and represent 0.37% of total loans as of September 30. This compares to 0.30% as of September 30, 2019. Our non-performing assets continued to decrease in the quarter and now represents 0.25% of total assets, a 3 basis point decline. Non-performing assets include non-performing loans of $34.8 million and $1.8 million in REO and other assets. The improvement in both categories continues to reflect the strong collection efforts by our special assets team.
While the NPA metrics improved during the quarter, the industries most highly impacted by COVID-19 have caused our adversely classified asset metric to deteriorate. We have shared our risk-rating philosophy in prior calls, and I will reiterate now that our moderate risk profile includes the practice of early identification of credit concern. What that means in this credit cycle is that we are proactively downgrading credits that we have that we see having the overtones of a long-term impact to the primary source of repayment, even if the borrowers are currently being supported by short-term deferrals or government stimulus or both in an effort to reflect the true credit risk. As of September 30, adversely classified loans represented 4.16% of total loans, up from 3.45% as of the linked quarter and compared to 1.28% as of the third quarter 2019.
Loan losses during the quarter totaled $2.5 million and were offset by recoveries totaling 445,000. On an annualized basis, this represents a loss rate of 9 basis points when the fully guaranteed paycheck protection loans are excluded. For the quarter, the loan loss provision was $13.6 million, down from $29.5 million recorded during the second quarter. The provision in Q3 was driven by the increase in classified assets as well as the charge-offs taken during the quarter. As we have noted, most of the reserve build for loss was captured early as we downgraded credit proactively. As of September 30, our ACL reserve now totals $168 million or 1.65% of total loans, up from 1.52% as of June 30 and 1.11% as of September 30, 2019. Excluding both paycheck protection loans and loans held for sale, our current ACL reserve represents a significant 1.86% of total loans. And I note that the reserve for credit losses provides a robust coverage of 482% of our nonperforming loans, up from 425% coverage as of the linked quarter. Quarter-over-quarter, the loan portfolio reflects a 1.6% decline in total excluding PPP loan. This decline is driven in large part by the continued rapid pace of residential refinances occurring in the sustained low interest rate environment.
We had continued strong growth in the multi-family construction portfolio at 14% for the quarter and a solid 31% year-over-year excluding the AltaPacific acquisition, which reflects our emphasis on providing affordable housing loans across our footprint. As has been discussed on previous calls, Banner's approach to providing payment relief to clients affected by COVID-19 has been borrowers specific and almost always limited to 90-day increments. Our ongoing portfolio reviews continue to be robust and covered nearly 90% of the commercial and commercial real estate relationships. These reviews have maintained focus on updating borrower financial information, including that of guarantors with an emphasis on current liquidity and cash burn rate as well as updating our view of collateral coverage. It is also important to note that Banner has a very limited number of loans that do not have personal guarantees providing tertiary support.
Looking specifically at deferrals on our early impacted COVID-19 loan segments, I note the following. Of the 3,370 loans totaling $1.1 billion that initially received payment release, we currently have 379 notes totaling $240 million under active deferral or 2.7% of the loan portfolio net of PPP. The balance of deferrals have expired and clients are returning to normal payment. As of today, we have not seen any increase in delinquency or payment performance within those clients who have returned to regular payment.
Of the $240 million active deferrals, 273 notes totaling $79 million are operating under their first deferrals and the 106 loans totaling $168.4 million or 1.8% of the portfolio have received the second deferral of up to 90 days. As expected, the second round deferrals have been primarily within the early impact segment. I will also note that commercial deferrals are roughly split 50/50 between interest only and full P&I deferral.
Reviewing the specific early impact industries, I will start with the hospitality portfolio. This has been the most impacted segment and the one that we anticipate will recover in years, not months. Nearly 35% of our adversely classified assets are in the hospitality portfolio. We have $73.5 million in hotel loans under active deferral, of which $68.1 million are second round. As a reminder, the hospitality segment represents less than 3% of our loan portfolio and currently 30% of the hospitality book is under [indiscernible]. Recreation and leisure represents approximately 1.5% of the loan portfolio with $36 million under second round active deferrals. Last quarter, we reported that the recreation and leisure portfolio was centered in fitness facilities, most of which were still closed. I'm happy to report that that has changed with most facilities now open, albeit on a limited basis and are reporting demand for their facilities and services. 13% of our adversely classified assets are within the recreation and leisure portfolio. The retail portfolio, which includes both investor and owner-occupied CRE as well as C&I exposure currently has $40.2 million or 3.5% under active deferral, $23.7 million of which is second round deferrals. This is down from $142 million in active deferrals as of June 30.
Retail exposure, including both commercial business and commercial real estate loans, represents approximately 13% of our loan portfolio and currently approximately 7% of our retail portfolio is adversely classified. Recognizing that trends in retail commerce have rapidly shifted during the pandemic, this is a portfolio we are watching closely. I will reiterate what has been stated before that we have no mall exposure, the portfolio is diversified in geography and the average loan size is less than $1 million. Active deferrals in the restaurant portfolio totaled $20.3 million or 8.5% of the restaurant book. Of these deferrals, one large loan represents 77% of the total and subsequent to quarter-end has returned to full payment. As we have discussed previously, the restaurant and food services portfolio represents approximately 2.5% of the loan book, is two-thirds real estate secured and is diversified by size and geography with very limited franchise exposure. Most of our clients are now open albeit under significantly reduced occupancy level. We continue to monitor this segment closely given the additional challenges associated with the following winter months in many of our markets based upon the reduced occupancy limits. Approximately 3.5% of Banner's adversely classified assets are in the restaurants and food services industry.
Active deferrals in the healthcare portfolio have reduced to $2.1 million, 70% of which are second round deferrals. This represents 0.4% of the healthcare portfolio. Our portfolio continues to reflect that this segment has bounced back from the initial closures. The portfolio is performing well and we expect limited further deferral request. Approximately 7% of our adversely classified assets are healthcare-related and they were classified pre COVID-19.
I will wrap up by noting that we have not made any material changes to our underwriting practices since the onset of the pandemic. Our ongoing quarterly portfolio review process is robust, has served us well over the past decade and will continue to serve us well as we navigate this economic downturn. We have long had a credit culture focused on a moderate risk profile, which set the stage for entering this credit cycle with excellent credit metrics. Our balance sheet is strong and we are well prepared for any potential further deterioration in credit quality over the next few quarters.
With that, I will hand the microphone over to Peter for his comments. Peter.
Thank you, Jill. As discussed previously, and as announced in our earnings release, we reported net income of $36.5 million or $1.03 per diluted share for the third quarter compared to $23.5 million or $0.67 per diluted share in the prior quarter. The $0.36 increase in per share earnings was driven primarily from a decline in credit loss provision expense. Core revenue excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value increased $3.5 million from the prior quarter as a result of growth in core deposits, along with an increase in mortgage and deposit fee income. Core expenses increased $3.6 million due to an increase in the provision expense for unfunded loan commitments and a lower deduction of capitalized loan origination costs. Loan loss provision expense decreased $16 million due to a more modest reserve build as a result of a stable economic outlook, a slowdown in the pace of downgrades and a continuing low level of charge-offs.
Turning to the balance sheet, total loans decreased $193 million from the prior quarter-end as a result of pay-downs and lower line utilization. Excluding PPP loans and held for sale loans, portfolio loans declined $148 million due primarily to prepayments in the one-to-four-family mortgage and commercial real estate portfolios and lower line utilization in the commercial business portfolio. Held for sale loans decreased by $73 million, principally due to a large bulk sale of multifamily loans carried over from the second quarter. Excluding the AltaPacific and PPP loans, loans declined by 1.7% over the prior year quarter. Ending core deposits increased to $326 million from prior quarter-end due to a continued increase in overall client deposit balance liquidity, net new account growth and a modest contribution from deposits generated from PPP loan proceeds originated in the third quarter. Excluding the AltaPacific acquisitions, core deposits grew 29% over the prior year quarter.
Time deposits decreased $127 million from the prior quarter primarily due to a decrease in brokered CDs while retail CDs declined modestly. FHLB borrowings remain even at $150 million to the previous quarter. Net interest income increased by $1.4 million as continued growth in core deposits resulted in $570 million or 4.5% growth in average earning assets for the third quarter, partially offset by a 16 basis point decline in the net interest margins from the second quarter. Compared to the prior quarter, loan yields decreased 10 basis points due to a combination of low-yielding PPP average loan growth, along with modest declines in existing portfolio loan yields as a result of repricing at lower market rates. Of the quarterly loan yield decline, PPP loans accounted for 7 basis points and the remaining 3 basis point drop was the result of portfolio loan repricing, partially offset by an increase in prepayment related loan income. Securities yields declined 38 basis points due to an increase in excess deposit liquidity invested in overnight funds at lower rates coupled with elevated prepayment speeds on mortgage-backed securities.
Total cost of funds declined 4 basis points to 27 basis points as a result of lower deposit costs, partially offset by an increase in wholesale funding costs arising from a sub-debt issuance at the end of the second quarter. The total cost of deposits declined from 23 to 17 basis points in the third quarter due to declines in retail deposit costs and a larger mix of non-interest bearing deposit balances. Brokered CDs accounted for 1 basis point of total deposit costs compared to 2 basis points in the prior quarter as the remaining brokered CDs matured during the quarter and were not rolled over. The ratio of core deposits to total deposits increased to 93% in the third quarter, up from 91% in the second quarter. The net interest margin declined 15 basis points to 3.72% on a tax equivalent basis. Of the total decline, the PPP loan program accounted for 3 basis points and the remaining 12 basis point decline was due to a combination of growth in excess deposit liquidity, lower loan yields, lower yields on securities, modestly lower loan yields and an increase in interest expense from the sub-debt issuance. We anticipate the margin will be range bound in the next quarter as PPP loan forgiveness related prepayment activity will be pushed out into the first and second quarters while further growth in excess deposit liquidity will be muted.
Total non-interest income increased $500,000 from the prior quarter. Non-interest income, excluding losses on the sales of and changes in securities carried at fair value increased $2.1 million. Deposit fees increased $1.2 million due to higher transaction volumes and lower fee waivers. Total mortgage banking income increased by $2.4 million due to an increase in residential mortgage gain on sale, driven by strong purchase and refinance activity. The purchase of refinance line declined to 44% of total production, down from 58% in the prior quarter with overall gain on sale spreads remaining in the high 4% range similar to the second quarter. Within this line item, multifamily generated $1.1 million on a gain on sale related to a bulk sale of multi-family loans in the second -- as the secondary market demand for these loans return to pre-pandemic levels.
Miscellaneous fee income decreased $500,000 due to declines in SBA income along with the loss on other assets sold. Total non-interest expense increased $1.9 million from the prior quarter. Excluding acquisition costs and pandemic specific operating costs, core non-interest expense increased $3.6 million. Salary and benefits expense declined $2.2 million due to an accrual adjustment associated with the reduction in recent medical claims experience and lower payroll taxes. The credits for capitalized loan origination costs decreased by $2.6 million in the third quarter due to lower PPP loan originations. Provision expense for unfunded loan commitments increased by $2.4 million due to lower line utilization and higher loss factors on impacted loan segments.
Acquisition costs declined $330,000 from the prior quarter, reflecting the completion of the AltaPacific integration and COVID -19 related costs declined $1.4 million as premium pay for essential workers and costs for working remotely declined. As noted in the earnings release, we are closing 20 branch locations by the end of the fourth quarter and that are in the process of implementing other cost efficiency initiatives across our support and delivery channels. In addition to the previously announced Islanders Bank consolidation that collectively are anticipated to reduce the Company's core expenses in the low to mid single-digit percentage range by the second half of 2021. With the rapid increase in our clients' adoption of digital service channels and the effectiveness of our team's transition to a remote work environment, we believe savings from our reduced branch network, facilities, travel and marketing costs will be durable beyond the pandemic. This concludes my prepared remarks. Mark?
Thank you, Peter. Rick and Jill for your comments this morning. That concludes all of our prepared remarks and Kate, we will now open the call and welcome your questions.
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Rulis of D.A. Davidson. Please go ahead.
Thank you. Good morning.
Good morning, Jeff.
Maybe I would just follow up on Peter's comment on the branch closure. Just to kind of get the dollar impact, do you anticipate any upfront charges and then maybe expense savings in dollars, and I guess the timing is would that be a full run rate in the first quarter of next year? And lastly, location wise is this exiting certain markets or is it kind of rifle shot a few that are redundant and just kind of what are the branches' profile that you are closing? Thanks.
Yes, sure. Jeff, this is Peter. Yeah. So the answer to the first question, we do anticipate restructuring and exit costs around the $4 million range in the fourth quarter that would cover the usual exit cost in terms of lease termination and writedown on facility assets and some severance related expense. In terms of the timing of the benefits of those branch closures, we'll begin to see them in the first quarter, albeit, we'll see some of the benefits in the impact of some other cost initiatives later in the year. And so in terms of guidance, we are anticipating seeing the impact to our core expense run rate really materialize in the second half of 2021. We will still have some merit increase related increase in compensation that will roll through in the second quarter. So the run rate earnings or the run rate core expenses will really begin to decline in the second half, which will be a function of not just the reduced branch count, but other initiatives related to our support and administrative support functions that will also see some lower expenses as we get further into 2021.
In terms of the types of branches that are included in the 20 there, generally we were not getting out of any markets, they're generally branches that are -- where we have solid presence in a given market and we are just reducing the number of branch locations in that market. And as you know, that process of rationalizing our branches is always done in the context of minimizing client impacts, minimizing deposit attrition and allowing us to continue to grow core deposits in the markets we're in. So they are all selected branches across all of our markets that meet those criteria.
Great, thank you. And Peter, the range bound margin characterization, any further color -- I mean, in terms of the sequential decline that we've seen, could you quantify? Is range bound -- is there equally some upside and some downside to that figure around $365 million reported, and I guess ex PPP or including PPP impact?
Yeah. And the context of that comment really are driven by the uncertainty of the excess deposit liquidity trajectory. So we -- as of today, we foresee that the PPP loan balances will stay generally flat for the fourth quarter as the rules around SBA forgiveness have shifted back the timing of the prepayment activity in that portfolio. So we, at this point, foresee that much of the forgiveness and acceleration of the processing fee related to prepayments will benefit the margin in the first and second quarter of '21. In terms of the fourth quarter, the variable will be principally the level of excess deposit liquidity and where that goes. If it stays more or less flat to the third quarter and the PPP loan balances stay stable, we would expect very modest decline in the margin all things equal, we will have some modest core loan portfolio decline due to natural repricing of term loans that will be parsed out if there was some continued declines in deposit cost.
So the comments around range bound a really tied to the level of deposit liquidity and the PPP portfolio, which at this point we think is fairly static. We have intentionally remained short in investing that excess deposit liquidity and overnight funds mix between the Fed and some money market balances and we are doing that intentionally due to the liquidity -- the potential volatility in deposit liquidity and then to maintaining optionality for higher yields as we go forward and further not risking any AOCI losses down the road by taking excessive duration right now.
Got it, OK. Thanks, Peter. And Rick, I appreciate all your help over the years. All the best ahead to you and look forward to Jill's input to so a great team. Thank you.
Thank you, Jeff.
The next question is from Andrew Liesch of Piper Sandler. Please go ahead.
Good morning, everyone. And congratulations, Rick, certainly well deserved. I'm just wondering if you guys can provide a little bit more detail on some of the underwriting behind some of the hotel properties and some of the retail properties, just LTVs maybe backing these properties but certainly appreciate the reserve build that you've had so far this year and the proactive downgrades. But I'm certainly curious on what you might have protecting the collateral behind that as far as underwriting is concerned.
Hey, Andrew, this is Jill. So as we look at the hospitality portfolio, pre-pandemic underwriting criteria would have suggested that loan to values would have been below 60% and that service coverage would have been north of 150 on the hospitality. The other category you asked was office -- or retail?
Retail trade. Yeah, I guess, some of that [indiscernible] properties.
So retail pre-pandemic, same thing. Our underwriting there -- we went into the pandemic with an average loan to value less than 50% on our retail portfolio and debt service coverage averaging 175 and above.
Okay, that's helpful. But you said you've been trying to get updated property values, I mean, I can imagine there are too many transactions that are going on, so lower property values have truly gone. But I mean, have you been like when you've been taking on this project, have you been lowering the property values along with what you've been seeing going on, you've split the business activity.
You're correct, There haven't been a lot of transactions. We have developed an internal model for bringing into the borrowers' expectations for operations and discounting the lost revenue over the period of time we think it will take to return to a normal stabilized operating value. So across the board, coverages may be gone from collateral at a 65% loan to value to estimating closer to 75 to 80 on a couple of the hospitality loans we've looked at. When we look at the retail properties, we have seen very strong rent collection and are not estimating any significant decline in value right now based on that data.
Okay, that's helpful. And then just generally, what are your borrowers saying about their businesses, have they been able to just change how they operate? I mean, obviously, it sounds like, it will be more stressed in the hotel and hospitality area, but have they been able to adjust operating cost and try to find other ways to grow revenue in the midst of the pandemic?
Certainly, that's client by client, but, yeah, they're shifting as they can whether if you're thinking restaurants, outdoor dining, ghost kitchens, ramping up delivery versus just the dine-in operation and hospitality reducing staffing and opening only certain floors, things like that to reduce some of their expenses. So they're doing what they can to mitigate some of the reduced top line revenue.
Okay, thank you for taking my questions on credit, I will step back. Thank you.
The next question is from David Feaster of Raymond James. Please go ahead.
Hey, good morning everybody. First, I just want to echo the comments. Congrats. Rick, on your retirement and Jill excited to be working with you. I just wanted to start on loan growth. Originations have been strong. You're clearly open for business, you've got an appetite for credit, just curious to get your thoughts on pay-offs and pay-downs, is it the competitive landscape where it's just competitors are pricing things, they just don't make it worth it or is it borrowers paying down lines? And then just how do you think about net growth going forward?
David, starting with the line activity, we haven't seen borrowers tame down their lines, that much line usage is what it has been on average. When we went into the pandemic, we would have expected it to increase may be. And we didn't see that either. So that's running about average. The decline in loan growth, as I said in my prepared comments, is really driven by the low rate environment and the continued residential refinances coupled with -- we're seeing some of that in the commercial real estate as well as people are shopping. What do we see for loan growth? We've said that 2020 will remain flat because of these payoffs. And then any loan growth in 2021 is going to be based on, in our view, a sustained improvement in the economy coupled with the development of a vaccine and the overall improved confidence.
So I would expect that the loan growth as it picks up in the 2021 will be more back loaded as the commercial customers become more confident.
Okay. That's helpful. And then just following back on the branches, so I guess how -- what kind of attrition do you expect with these? I guess, just given the current environment and higher adoption of technology, would you expect attrition to be kind of less than what you've seen in the past and how has attrition been on the recent branches that you've closed? Just curious any thoughts on there? And then just what do you expect the earn back to be on these branch closures?
Yeah, David, it's Peter. So, yes, the branches, as I mentioned earlier, they generally are smaller balance locations. So they -- in most cases, they are dilutive to ROA and for the whole -- and the retail organization. And so they are typically smaller balance locations and they typically are relatively close to the next closest branch and so we do expect some attrition. It's a little bit different by location, depending on what market it's in, how far away it is from the next closest branch. But it's typically mid-single digit type attrition assumptions on balance across the portfolio of branches we're getting out of. But they are also relatively small. So it's actually a fairly small total of our total deposit balance represented in those 20 locations. So, again, it's -- in terms of payback, we typically look at -- rather than pay back, we look at the ongoing economic benefits to the Company and the accretive value closing them post exit costs. Most of these branches, they are a mix of owned locations and leased locations. This group that's going in the fourth quarter is more heavily on the owned side. So we've included expectations for any losses on selling the real estate in the $4 million estimate, I mentioned earlier.
Okay, that's helpful. I appreciate that. And then just -- you guys have done a terrific job on the deferral front, I mean, the deferrals have come down materially. Just curious, your approach to the second round deferrals, how are those conversations? Did you require any additional collateral or anything like that? And then for those borrowers that need additional relief, how do you -- after the second round of deferrals expire, how do you plan to address that? I mean, would you potentially grant a third-round or at that point take it to either non-accrual or TDR and work it out? Just curious of your thoughts there.
The general answer to that question is that whether it was first round, second round or as we look into potential additional deferrals, it really is case-by-case specific and a function of not only how that specific asset within our borrowers portfolio is performing but their global picture and what kind of support they can bring. Are we getting additional collateral? Certainly if there is collateral to get, we're doing what we can to shore up some of that, sometimes it's not really about collateral and it's working out a longer time period to recover. So will we grant more? It's possible and especially in our markets where if you look at Oregon, where we don't really have an option as to whether we grant deferrals with the Governor's law 4204, if there is real-estate secured loans in Oregon that were impacted by COVID, if they can show us that we have to give them a deferral through the end of the year. So, again, it's going to be case-by-case and sometimes out of our control. Would we work them out? Would we put them on nonaccrual?
Certainly if we get to a point where we think that there is a chance that we have loss and if they're not going to be able to service the debt with reasonable bank concessions or other collateral sources, we're going to put it on nonaccrual take losses as we see them.
Understood. Thank you.
[Operator Instructions] The next question comes from Christine Bohlen of KBW. Please go ahead.
Hi, it's Jacque Bohlen. I'm not sure where the Christine came from. Hi, good morning everyone. Just wanted to quickly get some -- couple of clarification questions on the expenses. The branch consolidations, are any of these in any way related to M&A?
Hi. Yeah, Jacque, it's Peter. No, no, these are all core branches for us, they are not related to any of the prior acquisitions we've done. Some of them have come from prior acquisitions but they're not tied to any new M&A activity.
Okay. I had thought that all those had already been completed. I just wanted to double check on that. And then, you had referenced to low to mid-single digit percent decline in expenses, what do you use as the base for that calculation?
Yeah, that's a good question. We're using our core expense base in 2020. So we're thinking about it in terms of our full-year 2020 core expense run rate and then relative to that number, what our run rate expenses will be in the second half of 2021.
Okay. And how do you describe the processes gone through when looking at these expenses? What I mean by that is has this been a very thorough scrub in which you've looked at different areas and really evaluated all the branches or is this an ongoing process where maybe this might be the bulk of what you do, but there could be other incremental cost saves in the future.
Yeah, this is a -- we've taken a comprehensive enterprise review behind the numbers that I provided, they will -- the timing on when those cost savings are implemented, however, are spread out. So they don't all happen in a single quarter. In addition to the branch closures, there's a series of initiatives that will take effect quarter-to-quarter as we go through '21 and even some that will take effect in '22. So it will be kind of a slow ramp down to that baseline over time. And then as we go through that, yes, there may be some additional opportunities or adjustments that materialize against that number that will be addressed at that point. So I would characterize it as, it is an enterprise effort but it will be scheduled out over the next six quarters and there may be some additional savings that materialize, but we're not committing to those at this stage.
Okay. Thank you. That's helpful. And then just lastly, in terms of mortgage banking, I am realizing that we're still pretty early in the quarter, but how does the momentum compare in October versus what you saw in the third quarter and also the gain on sale margin?
Yeah, it's been -- the pipelines are still remarkably robust for this time of the year as we typically see a big slowdown in mortgage activity in Q4 and Q1 due to the weather, but they continue to be very strong going into the beginning of the fourth quarter we do --. That being said, we do anticipate a slowdown from what was a record third quarter for the Company but we still see there's a lot of pipeline out there yet to process that will carry some of this additional volume all the way through Q1. So we think the elevated level will continue, albeit, at a lower level in Q4 and in Q1, before it really begins tapering down as some of the burn out around refinance begins to take a hog. But we will see some decline, but we still see good momentum going into Q4.
Okay. And how about the gain on sale margins?
That's still holding up. But as you know we've said, we're seeing gain on sales in the mid-4% range, that's likely to begin to come down a bit, too. It's been remarkably strong because of the demand and our ability to throttle that demand with increased pricing. So we think that gain on sale is going to come down a bit from where it's been, but it will still be above our long-term average.
Okay. Great, thank you. And I echo everyone else when I say congratulations, Rick, and best of luck in the future.
Thank you.
The next question comes from Tim Coffey of Janney. Please go ahead.
Great, thanks. Good morning, everybody. First off, Mr. Barton, thanks for your help through the years and I wish you the best going forward as well. If I can start with kind of the deferrals, the loans that received a second deferral, when did the majority of those happen?
So that's been a moving target as well, Tim, first deferral starts in March and continued to come on throughout that first quarter and even into second quarter. And so some of the second deferrals, people went back to payments and then have come back and said, all right, I've made a couple of payments, but now I'm heading into what I am concerned about in terms of thinking hospitality the November, December, January winter month. And so they've come back and requested deferrals. So it's a moving target. That's the short answer.
Okay, Appreciate that. And then the length of the deferral period, are those still 90 days or just stretched about to 180?
Oh, no. By and large, all of our deferrals first or second were limited to 90 days, so that we could reassess, get more updated information and make another informed decision as to what to do in that second half.
Sure. Okay, makes sense. And then, is there a commonality among the hotels that received the second deferral? Is there a common trend among the group?
[Indiscernible] reduced occupancy from more of the urban central hotels, so significantly reduced occupancy would be the trend for the second deferrals.
Okay, alright.
Okay.
And you said, those were in urban areas.
Yes.
Just kind of a general question about -- given your footprint in the different states sector and have the restrictions on business activity in those different states significantly impacted borrowers in the last couple months?
Has the business activity significantly impacted borrowers?
Or just the restrictions by the different states that you operate in.
Right. Where I was going was that most of them have pulled back, so we're in Phase 2 and 3 in most of our states, so economic activity is picking up. And so to that regard, it's benefiting borrowers. The question becomes what happens as we go into the fall with the virus and associated pullbacks.
Okay. And Jill, some of the comments you've made on the call today kind of make it sounds like the demand shock that we're seeing right now could be temporary in that there's money on the sidelines, a vaccine develops things start to turn getting better in terms of dealing with the cases of COVID, that all that money could come back off the sidelines and start getting back into the economy. Is that accurate? Does that describe how you're feeling actually?
I think that people are just reserved right now waiting to see what happens, what happens with the election, what happens with the virus. I think we need to get through the winter months and see if there is more pull back before they'll start making the capital investments that were may be teed up before we went into COVID-19.
Okay. And the demand shock isn't unique to Banner, we've seen it across a bunch of the banks in the last -- this quarter were commercial real estate, for instance, those types of borrowers have been moved into the sidelines, I'm just wondering that if this does -- this uncertainty does continue through the end of this quarter, that maybe loan growth could be lower than what you guys have been talking about? Is that possible?
Well, we have been saying that through 2020, our loan growth is going to be flat and I think that's where we'll be. So we're slightly down 1.6% I think it was year-over-year and driven primarily by that residential refinance. So I think that we're going to be flat for 2020 and then we'll see some pickup in it in 2021 later in the year.
Okay, great. I appreciate. Those are all my questions. Thank you.
Thank you, Tim, this is Mark. Let me just say that what we're seeing in the pipeline book as it relates to commercial demand is it's not deteriorating farther. So it's kind of plateaued, which may be a harbinger for more activity going into 2021 if there is some resolution in some of the items that Jill had already mentioned.
This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for closing remarks.
Great. Thanks, Kate. As I've stated, we are very proud of the Banner team as we continue to do the right thing as we battle this COVID virus. Want to thank you all for your interest in Banner and for joining our call today. We wish Rick well in his retirement. He will still have some participation through the end of the year in assisting us but we look forward to him enjoying his retirement into 2021. And thank you, again, for your time, and your interest in our company and we look forward to talking to you in the future. Have a great day, everyone, and be safe.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.