Banner Corp
NASDAQ:BANR
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Banner Corp
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Good day and welcome to the Banner Corporation's 4Q 2020 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Mark Grescovich, President and Chief Executive Officer of Banner Corporation. Please go ahead.
Thank you, Sarah, and good morning, everyone. I would also like to welcome you to the fourth quarter and full-year 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 Credit Officer; and Rich Arnold, our Head of Investor Relations.
Rich, would you please read our forward-looking Safe Harbor statement?
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, 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 the earnings press release that was released yesterday and our recently filed Form 10-Q for the quarter ended September 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. 2020 was certainly an interesting and challenging year, and I hope you and your families are well as we all continue to 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 a high level commentary on the quarter and full-year performance; second, the actions Banner continues to take to support our stakeholders - all of our stakeholders, including our Banner's 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 full-year 2020.
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 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 our performance. As announced, Banner Corporation reported a net profit available to common shareholders of $39 million or $1.10 per diluted share for the quarter ended December 31st, 2020. This compared to a net profit to common shareholders of $1.03 per share for the third quarter of 2020 and $0.95 per share for the fourth quarter of 2019.
For the full year ended December 31st, 2020, Banner Corporation reported net income available to common shareholders of $115.9 million, compared to $146.3 million for the full year of 2019. The full-year performance was impacted by the allowance for credit losses billed based on the estimated impact of the COVID virus on the economy, our strategy to maintain a moderate risk profile, an inflow of liquidity coupled with very low interest rates, 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 $211.9 million for the full-year 2020, compared to $201.6 million for the full year of 2019, an increase of 5%. This measure I believe is helpful for illustrating the core earnings power of Banner.
Our full-year 2020 revenue from core operations also increased 5% to $579.6 million, compared to $551 million for the full year 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 0.83% for the year.
Once again, our core performance this quarter and for the full year reflects the continued execution on our super community bank strategy even with the challenges of the pandemic, 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.
To that point, our core deposits increased 31% compared to December 31st, 2019 and represent 93% of total deposits. Further, we continued our strong organic generation of new client relationships in 2020.
Reflective of this solid performance, coupled with our strong tangible common equity ratio, we issued a dividend of $0.41 per share in the quarter and authorized the repurchase of approximately 5% of our common stock.
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 our 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 in 2020, we 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 made an important $1.5 million commitment to support minority-owned businesses in our footprint. Significant contributions to local and regional nonprofits have provided financial support for emergency and basic needs in our footprint.
Let me now turn the call over to Jill to discuss trends in the loan portfolio and her comments on Banner's credit quality. Jill?
Thank you, Mark, and good morning.
Pre-pandemic we will begin this credit portion of the call by stating that Banner's credit metrics remained stable. And for each of the last three quarters, we have indicated that our credit metrics did not yet capture the changing economic and credit landscape. Today, I will continue that theme, noting that our credit metrics continue to be supported in part by previously-granted payment relief and/or the various fiscal stimulus programs that were in place during the latter half of 2020.
That said, our moderate-risk profile and underwriting standards have served us well as we continue to navigate this economic cycle. Banner's delinquent loans in the fourth quarter totaled 0.37% of total loans, consistent with the prior quarter and compared to 0.41% as of year-end 2019.
Nonperforming assets represents 0.24% of total assets, a decrease of 1 basis point when compared to the previous quarter. Non-performing assets are comprised of nonperforming loans totaling $35.6 million and REO and other assets of $900,000.
I am pleased to report positive movement in our adversely classified asset metric quarter-over-quarter. As of December 31st, our adversely classified loans represent 3.45% of total loans, down from 4.16% as of the prior quarter and compared to 1.22% as of December 31st, 2019.
Nearly 25% of the decrease in classified loans in the quarter is the result of strong collection activity resulting in full pay-offs. Less than 5% of the change was the result of partial or full charge-offs and the majority of the change, approximately 70%, is the result of risk rating upgrade.
As of December 31st, our ACL reserve totaled $167 million or 1.69% of total loans, up from 1.65% of total loans reported as of September 30th and from 1.08% as of December 31st, 2019. Excluding both the paycheck protection loans and loans held for sale, our current ACL reserve represents a significant 1.90% of total loans and provides a robust coverage of 501% of our nonperforming loans.
Loan losses during the quarter totaled $2.9 million and were offset by recoveries of $2.8 million. We released $601,000 of our reserves for credit losses in the fourth quarter in comparison to a provision of $13.6 million as of the quarter ending September 30th and down from $29.5 million recorded as of the quarter ending June 30th.
Excluding the fully guaranteed paycheck protection loans, our loss rate was 6 basis points for the full year ending December 31st. The modest reserve release is a direct function of the decline in the loan portfolio balances that occurred in the fourth quarter and more specifically tied to the full pay-off of nonperforming loans that had impairment reserves aggregating in excess of the overall relief.
As we have noted in prior calls, the majority of our reserve build was captured early in 2020 as we were proactive in downgrading those credits that were most impacted by the economic downturn. We have communicated that future reserving would be a function of the rate of our loan growth, as well as economic indicators that are being driven in large part by the pace of the virus, the development and distribution of the vaccine, and the rollout of additional stimulus supporting the economy.
I think it's important to circle back to the recoveries collected this quarter and note that they include the full recovery of a $2 million partial charge-offs taken in the second quarter on a sizable amount from credit. I call this out for two reasons; one, to emphasize the recoveries of this size are isolated events and two, to point out that our skilled resolution team is extremely focused on maximizing the bank's recovery as they manage through the collection process.
Reviewing the loan portfolio, we reported a quarter-over-quarter decline of 2.9%, excluding PPP loans, and 5.1% when compared to the fourth quarter 2019. Nearly 60% of the decline is tied to residential properties and is a function of the strong residential purchase and refinance market that prevailed throughout 2020.
The low interest rate environment also led to a significant volume of commercial real estate loan refinancings within the investor and small CRE balance portfolios, down 3.4% and 6.5% respectively year-over-year, as well as within the agricultural portfolio, which was down 11% year-over-year.
I also note that credit line utilization is down nearly 5% when compared to year-end 2019, a reflection of the current economic environment with borrowers maintaining their liquidity and access to other sources of cash. These declines were offset in part by the continued strong growth in our multi-family construction portfolio at 31% year-over-year, as well as multi-family permanent CRE loans up 10% year-over-year.
We have continued to state that we do not expect normalized loan growth rates to return until the economy stabilizes, which we anticipate occurring in late 2021 as a function of widespread vaccine distribution and virus containment.
Throughout the pandemic, we have remained committed to assisting our clients in a safe and sound manner as they deal with the economic impact to their businesses, and we have been providing regular updates regarding the level and trend of payment relief in ground. The balance of loans operating under deferral have continued to decline. We currently have $75.4 million in loans operating under a form of payment relief or 0.85% of total loans, net of the PPP loans.
This is down from a high of $1.1 billion as of June 30th. Active deferrals include $31.6 million in mortgage loans under forbearance, with the balance $43.8 million comprised of commercial loans almost entirely found within the identified at-risk industries. These commercial deferrals are split 60% interest only, with the remaining 40% operating under full principal and interest payment relief. Also of note, 77% of the commercial deferrals are operating under a second round of relief.
Specific to the commercial deferrals, 11 loans totaling $22.4 million are within the hospitality portfolio, three loans totaling $10 million are in the real estate rental and leasing industry, seven loans totaling $4.5 million are in the retail trade industries, two loans totaling $3.2 million are in the recreation and leisure portfolio, five loans totaling $1.4 million are in the restaurant and food services portfolio and seven loans totaling $2.3 million are spread throughout the balance of our loan portfolio.
I will reiterate what has been stated previously. Banner's approach to providing payment relief to clients affected by COVID-19 has been borrower specific, and almost always limited to 90-day increments. We review each request in light of current operating performance, maintaining our focus on the borrowers liquidity and current cash burn rates, as well as our view of the current collateral coverage and any additional support provided by guarantors. And I will again note that Banner has very limited number of loans that do not have personal guarantees providing tertiary support.
Shifting the focus to adversely classified assets. In alignment with our moderate-risk profile, we continue to be proactive in reviewing our portfolio and downgrading credits that have the overtones of a long-term impact to their primary source of repayment. Our ongoing portfolio reviews continue to serve us well in identifying those at-risk loans.
Currently, 30% of Banner's adversely classified assets are located within the hospitality portfolio, 17% are located within the recreation and leisure portfolio, 8% of the adversely classified loans are within the healthcare services portfolio, all of which were adversely classified pre-pandemic, 6% of the adversely classified loans are within the restaurant and food services industry, and 4% are located within the retail trade industries. Outside of the at-risk segments, there is no concentration of business line or asset class that is adversely classified.
I will close my prepared remarks by reiterating that we have not modified our underwriting practices since the onset of the pandemic. We continue our long history of robust quarterly portfolio reviews, and we have maintained a credit culture focused on a moderate risk profile.
We have a strong balance sheet, a robust reserve for credit losses and capital levels well in excess of regulatory requirements. We continued to be well positioned for any further deterioration in credit quality over the next few quarters.
With that I hand the microphone to Peter for his comments. Peter?
Thank you, Jill, and good morning, everybody.
As discussed previously and as announced in our earnings release, we reported net income of $38.9 million or $1.10 per diluted share for the fourth quarter, compared to $36.5 million or $1.03 per diluted share in the prior quarter. The $0.07 increase in per share earnings was driven as a result of a decline in credit-loss provision expense, offset in part by lower non-interest income and higher non-interest expense.
Core revenue excluding gains and losses on securities and changes in fair value of financial instruments carried at fair value decreased $5.5 million from the prior quarter, primarily as a result of a decline in mortgage revenue. Core expenses increased $5.2 million due to an increase in the exit costs related to branch consolidations, an increase in litigation-related legal expense and increases in advertising and direct-mail marketing costs.
Loan loss provision expense decreased $14 million due to a modest provision expense recapture as a result of a reduction in classified loans and decline in held for investment loan portfolio outstandings.
Turning to the balance sheet. Total loans decreased $292 million from the prior quarter-end as a result of the decline in the held for investment loan portfolio, along with paydowns of the SBA PPP loan portfolio, driven by the initial wave of loan forgiveness. Excluding PPP loans and held for sale loans, portfolio loans declined $187 million due primarily to prepayments in the one-to-four mortgage, investor commercial real estate and lower line utilization in the commercial business portfolios.
Held for sale loans increased by $58 million due to an increase in multifamily loan production to a more normal pre-pandemic levels. Excluding SBA PPP loans, loans held for investments declined by 5.1% over the prior year, driven by faster prepayment speeds and lower line utilization as a result of the pandemic induced low rate environment and systemic increase in borrower liquidity.
Ending core deposits increased $352 million from the prior quarter-end, due to an increase - continued increase in overall client deposit balance liquidity. Core deposits have grown an unprecedented 31% over the end of last year, reflecting an across our board build of client deposit liquidity, fiscal stimulus payments to consumers and proceeds from the SBA PPP loan program. Time deposit balances were flat to the prior quarter end and FHLB borrowings remain even at $150 million.
Turning to the income statement. Net interest income increased by $400,000 as continued growth in core deposits resulted in a $310 million or 2.3% growth in average earning assets for the fourth quarter, offset by an 8 basis point decline in the net interest margin from the third quarter. Compared to the prior quarter, loan yields increased 6 basis points due to a combination of an increase in PPP loan yields driven by loan forgiveness, prepayments in the CRE portfolio and loan workout-related interest recoveries. Excluding the impact of prepayments, interest recoveries and acquired loan accretion, the average loan coupon declined 7 basis points from the prior quarter.
While the pace of core loan yield decline has slowed significantly from the prior two quarters, modest headwinds to loan yield continue to affect the adjustable and fixed-rate term-loan portfolios, as they reprice at lower long-term rates.
Security yields declined 26 basis points due to an increase in excess deposit liquidity invested in overnight funds at lower rates, coupled with elevated prepayments on mortgage-backed securities.
Total cost of funds declined 3 basis points to 24 basis points as a result of lower deposit costs due to ongoing downward repricing of CDs and lower rates on interest-bearing demand accounts. The total cost of deposits declined from 17 basis points to 14 basis points in the fourth quarter due to declines in retail deposit costs and increases in non-interest bearing deposit balances.
The ratio of core deposits to total deposits remained at 93% in the fourth quarter, the same as the prior quarter. The net interest margin declined 8 basis points to 3.64% on a tax equivalent basis. The decline was driven by an increase in excess deposit liquidity invested at overnight rates.
Looking forward to the next few quarters, we anticipate the margin to be impacted by the offsetting effects of PPP loan forgiveness and other loan prepayment activity against the dilutive impact of new PPP loan production, related deposit generation and ongoing repricing of the loan and securities portfolio. Given a number of moving parts, going into the first quarter, quantity and timing of any of these elements have the ability to drive the margin modestly above or below our fourth quarter level.
The non-interest income decreased $4.7 million from the prior quarter. Non-interest income, excluding losses on the sales of securities and changes in securities carried at fair value, decreased $5.9 million. Deposit fees declined $450,000 due to an annual card plastics expense. Total mortgage banking income decreased by $5.9 million due to a seasonal decrease in one-to-four family held for sale volumes, as well as a decrease in the gain on sale spreads.
The percentage of refinance volume increased modestly to 49% of total production, up from 44% in the prior quarter. Within this line item, multifamily loan-related gain on sale decreased $700,000 from the prior quarter, as both loan sales declined and pending sales were pushed into the first quarter. Miscellaneous fee income increased $355,000 due to increases in swap and SBA loan fees, partially offset with asset write-downs on branches closed during the quarter.
Total non-interest expense increased $5.2 million from the prior quarter, excluding merger costs and pandemic-specific operating costs, core non-interest expense increased $5.1 million. Salary and benefits expense declined $266,000, primarily due to an accrual adjustment associated with the reduction in medical claims experience and lower payroll taxes.
The credit for capitalized loan origination costs increased by $900,000 in the fourth quarter due to higher overall loan production. Advertising and marketing costs increased by $1.7 million due to increased direct mail, advertising and seasonal increases in charitable contribution expense.
Professional and legal expenses increased $3.2 million due to an accrual for pending litigation and consulting expenses for new services and infrastructure enhancements. Provision expense for unfunded loan commitments decreased by $336,000 due to lower line utilization and corresponding increase in unfunded commitment balances. Merger costs increased $570,000 from the prior quarter, reflecting preparations for the upcoming Islanders Bank merger, while COVID-19 related costs continued to decline following $440,000 from the third quarter.
As noted in the earnings release, we consolidated an additional 15 branch locations in the fourth quarter, bringing the total to 21, including the six locations consolidated in the third quarter. Collectively, this represents a 12% reduction in the number of branches a company had at the end of the second quarter. Preparations for the merger of Islanders Bank with Banner Bank are proceeding smoothly, with closing on track for this quarter.
As referenced last quarter, ongoing efficiency initiatives, in addition to the branch consolidations, are in flight across the support and delivery channels that will benefit the core expense run rate as they are implemented prospectively during the course of the year. As we implement these efficiency initiatives, we anticipate taking another $4 million in restructuring costs in the first quarter and another $1.5 million in the second quarter.
This concludes my prepared remarks. Mark?
Thank you, Jill and Peter, for your comments. That concludes our prepared remarks. And Sarah, we will now open the call and welcome your questions.
[Operator Instructions] Our first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.
Peter, just to follow up on the - your expense commentary, I guess if you - if we remove some of those restructuring costs you had in the fourth quarter, what could be somewhat one time, I don't know if you can speak to the legal expense, but I guess on a go-forward basis again, if we exclude the restructuring costs just trying to get to kind of a core number and given the work you're doing in-house kind of a growth rate or any gauge on what you think the expense levels look like in 2021, again ex those restructuring costs?
Yes, Jeff. We - as we indicated in the last call, the branch consolidations combined with a number of other efficiency initiatives across our support administration and delivery channels are being implemented prospectively during the course of this year, 2021, and so the effects of that will be continued decline in core expenses as we go through the year. There will be some restructuring costs that go with those initiatives.
So there will be a bit of lumpiness as we get to that landing point, and we anticipate when we get to that landing point our run rate core expenses will be in the low-single-digit percentage range below what we were spending in 2020. And so that's the expectation. There's not a single quarter will all of that expense improvement will be achieved. It will be perspective as we go through the year. So you'll see generally soft landing to that number by the time we get to the fourth quarter.
Peter, maybe if you could just help me, what would you claim core expenses were in the fourth quarter?
Yes, we would exclude the restructuring costs, the litigation accrual and the provision for unfunded commitment expense that tends to move around, but it's not part of the core expense, and so we take those out. We also had some seasonal increases in some, I would call it, some reinvestment in our advertising and marketing efforts along with some contributions, charitable contributions, theory contributions in the fourth quarter that were higher than what we will normally incur period-to-period in 2021, so that piece might adjust as well for more of a normal run rate.
And so those are the items I would consider adjusting as you think about the core expense run rate and then the effects of our perspective efficiency improvements laid on top of that going into 2021.
Okay. Maybe just switching gears on the growth side. It sounds like taking somewhat of a conservative approach on until the economy and impacts of the pandemic sort of wash out, not making any, I guess, second half of the year is where you've pointed to recovery. Mark or really anybody, just looking at the growth for the year and where you sit on in-house kind of appetite to book loans versus demand out there as well, and any commentary on growth outlook in 2021 would be helpful?
Yes, Jeff...
Yes, Jeff. This is, Jill. Go ahead, Mark.
Go ahead. No, after you, Jill. Go ahead.
Okay. I was just going to say, Jeff, that, yes, we really are targeting normalized growth rates to come back in the second half of 2021. I mean, in our markets right now with the economy still shutdown, we had the virus growth in every - the businesses are basically closed restaurants, gyms, and things like that. Clients - the pipelines are starting to grow, but their desire to actually spend the money we think will be delayed, and then when you factor in the PPP loans coming off the books through the forgiveness, we just think that 2021 will be a flat year in terms of loan growth overall.
Okay. Jill, just to clarify that. Your commentary on a flattish portfolio includes the expected - well, I don't know commentary on round 2 PPP, but those flattish comments are inclusive of expected forgiveness out of round 1 PPP. Is that correct?
Yes, that would be the goal.
Suggesting some modest growth in the back half of next year to offset it.
Right.
Yes, Jeff. This is Mark. And the only other thing I'd add is, it's not just the PPP loans. We are seeing that the mortgage business continues to be strong. You can see that in the headlines even today. So, we're going to continue to see some refinance out of our one-to-four family book.
Our next question comes from David Feaster with Raymond James. Please go ahead.
I just wanted to, kind of, follow-up on Jeff's line of questioning, and may be if you could just give us - it's great to see originations start to accelerate. It looks like you're seeing some strength, especially in the construction and land-side. Is there any color - what you're seeing there? And then maybe just kind of a positive market, where are you seeing opportunities for growth across your footprint?
Good morning, David. This is Jill. So, the residential construction business is strong across our footprint, and as - it's turning quickly. So as they are building, the homes are selling and the market remains in balance within that product line. The multi-family, CRA affordable - affordable housing multifamily is a strong market as well and that goes across our footprint as well.
What we're not seeing right now is the commercial investment that's where the clients are holding back and waiting to see the economy recover before they really start the reinvestment. And our appetite for loans, the same - we want loans. We are open for business. It's really waiting for those clients to be ready to deploy their capital and reinvest.
Okay. And then just from like a geographic perspective, where are you seeing opportunities?
We're seeing them up and down the I-5 - we're seeing them across the footprint, really. It's just on a reserve basis, right. I mean, we are growing loans or booking loans in California, we are booking loans in Washington. They're hit in this across the footprint based on industry and the strength of that particular businesses line of business. I guess it's how I would answer that.
Okay. That's helpful.
Yes, David. This is Mark. Let me just add on to that. Here's how it's going to manifest itself, right. It is - once there is some clarity on the economy and you start to see a little bit of rebound, the first thing our clients are going to do is utilize their lines of credit, right. They're going to need to build additional inventory to meet demand. They're going to be financing receivables. So the line utilization is going to lead out of this, then they will become more of a capital investment.
As that occurs, there is a number of businesses out there in our footprint that have been upset with some of their institutions, including some of the large institutions, and then they will take the opportunity to review their business and who they use financing for. So we're expecting a good portion as the economy rebounds to have really good opportunity for our value proposition.
Okay. That's extremely helpful. And then, maybe just - could you just talk about your asset sensitivity here today, just in light of the liquidity and the opportunity for drawdowns on C&I lines and the impact of floors? Just curious how your asset sensitivity might have changed and expectations for benefits from the steepening of the curve, and just how you're thinking about managing asset sensitivity going forward?
Yes, David. This is Peter. I can address that. Yes. So we've become modestly more asset sensitive than we were earlier this year. And as we discussed, we've taken the approach of keeping all of this excess deposit liquidity we've enjoyed, invested relatively short.
So a large portion of it is sitting in overnight investments, which albeit at low yields today and having a dilutive effect on the current margin have the benefit of rising quickly as rates move up, especially in the long end of the yield curve. We've intentionally have been very conservative in laddering that excess liquidity in the longer duration investments. And we think the opportunity cost of waiting is worth it. And so, we are more asset sensitive at the end of this year than we were six months ago.
And then as we've talked, we've had a process and a program of putting floors on our floating rate loans as the money has originated, and that has kept our loan yields strong throughout the year. About half of our floating rate portfolio have floors that are in the money today and about a third of our loan portfolio is floating.
And so, as the short-end begins to go up - if it does go up on the road, we will be a little bit floor catch up before we see the loan yields improve, but then on a long end, we'll see some more immediate improvement on loans that are priced in the three-to-five year point of the curve or longer-term loans that enjoy higher rates down the road.
And then on the funding side, as you know, we've got a higher percentage of non-interest bearing DDA, and we have low-cost money market and savings, deposits on top of that, which will reprice much more slowly than market rates, as rates go up in general. So we think we're well-positioned for rising rates and we've intentionally positioned our balance sheet to do that even at the expense of some current net interest margin.
Okay. That's helpful. And then just last one for me. Just any thoughts on the fee income line? I mean mortgage has obviously been a lifeboat in what has otherwise been a challenging revenue backdrop. Just I guess, obviously, mortgage is still performing pretty well. Just are there any other business line which you are interested in expanding to? How do you think about mortgage going forward? And just where are you at in the process of maybe reinstating some of those waived fees that we waived earlier on in the pandemic?
We - mortgage, I'll speak to mortgage. Our mortgage business continues to remain resilient. We had one of the strongest production quarters, and the fourth quarter was traditionally is a down quarter for us, given the seasonality and weather-related reduction in mortgage demand. But our pipeline still remain robust going into the first quarter and likely even into the second quarter for mortgage.
And if you look at our mix, it's not - half of our production is purchase not refinance. So we're not - while refinancing is an important element, it's not the entirety of our mortgage demand. So we think the mortgage business will remain strong this coming quarter, and there's good signs it will continue to perform well until the second quarter before coming back into more normal levels as the refinance demand begins to ebb away.
On the other line items, we've been working through on the deposit fees. We did have some waivers that affected us. A lot of those waivers have been released. We are putting in place some price adjustments that will affect and positively improve the deposit fee run rate going into 2021. And so we'll see some benefits there along with additional account growth that will drive that up.
And then more recently, we've seen some strength in the SBA gain on sale, the swap program is generating more demand that as recently as clients are looking to lock-in and the perception rates are going up, and we're seeing along and go up. So swap fee income we expect to be strong for the rest of this year.
So we think those are the kind of core business lines, including treasury management will continue to perform well as we go into 2021 even as mortgage perhaps slows down in the second half of 2021.
Our next question comes from Andrew Liesch with Piper Sandler. Please go ahead.
It looks like - hi. It looks like you had some good - nice decline in the PPP loans as they were forgiven - some of them were forgiven here in the fourth quarter. Can you just comment on what you've seen so far in January as that pace accelerated, and what are you seeing so far on demand for the next round of PPP funding?
I can speak to that, Andrew. Yes, we - in terms of the original PPP program, we're seeing a steady pace of loan forgiveness being processed through. We've got a strong infrastructure and team, and when all of the forgiveness requests and process and so, we'll see a steady pace of loan forgiveness as we go through the first and second quarter. I would say what we see today is probably more of an even split of forgiveness between Q1 and Q2 and perhaps even a higher amount of it going in Q2 than we had anticipated in the last quarter. So I would characterize the forgiveness income being continuing in Q1 but probably even higher in Q2.
And then on the new program, we've had very good receptivity with our existing clients on applying for the new round of PPP loans, and that program is ramping up nicely, and - but we don't expect the forgiveness on those loans to benefit earnings until the second half of this year. We will say that the percentage volume of the second round of PPP loans is likely to be less than 50% of the amount that we originated in the first round. It's a little early to gauge right now. But right now, it would be 50% or less of what we originated in round 1.
So - it sounds like the fee recognition maybe a little bit less than we might have thought in the first quarter, but then a little bit stronger in the second quarter, and then trailing off last part of the year until that the second round of PPP fund loans could get forgiven?
Yes. That's fair. And it's like - it's hard to have a crystal ball here on the timing. But I think that's you've articulated, probably, the best estimate that we have at this point.
Got it. So that'd certainly be beneficial to the margin, but then on the negative side, they get the wildcard. This remains liquidity, this - that seems to be staying elevated activity outlook on what you're seeing with those funds to think maybe, if utilization rate improves that liquidity goes away late in the year. Just any comments around that, please.
Yes, we anticipate with the new round of PPP loans that about 80% of those loans turn into deposits through - that come into the Banner checking account. So we'll see some more deposit build related to the new PPP round. And then, the offsetting effects of that will be the pace of that - the excess liquidity getting deployed back into the economy.
So it's really a function of the pace of economic reopening and a resumption of consumer spending and business investment that's going to drive the outflow of our excess deposits. We - so far we haven't seen it manifest yet, but if the economic forecast hold up as they are right now, we would expect that excess deposit liquidity to begin flowing off during the course of 2021, and so - but again, it's - we don't have a - we can't give you any specific guidance on the pace or timing of it.
Our next question comes from Jackie Bohlen with KBW. Please go ahead.
I wanted to just circle back on the comment regarding, with PPP balances - with loans staying essentially flat with those, and when looking at it today and those are roughly $1 billion and I understand that there is going to be some inflows coming in there. So just looking at the growth with your expectations for it has not returned to a normalized level until maybe the latter half of the year, do those expectations also include a rebound in some line utilization? I know you mentioned that that those were down roughly 5% year-on-year?
Good morning, Jackie. This is Jill. Yes, I think, even as Mark suggested earlier, that will be the first thing we'll see as the economy rebounds and businesses return more to utilizing their resources. It will be to draw down their lines and then to come in and invest in further capital equipment expenditures, things like that. But we would expect line utilization to return more normal towards the end of 2021 as well.
Okay. So I guess just to kind of sum up the pushes and pulls within the loan portfolio from a point-to-point basis at year-end 2020 to year-end 2021, you'd see PPP outflows, some inflows at a lower rate than the original program. You have an increase in normalization and line utilization on general growth as the economy recovers. And then also, you had mentioned some of the new prospects that you have from some non-customers that could become customers. Is that a fair summation?
Sure. The only thing I would add to that, Jackie, would be the continued paydown via the refinances that we're having in the residential real estate and recognizing that those continue to flow over into especially the small balanced real estate loans, and lot of the consumer small balance loans often are secured by home equity as well when they are underwritten. So you'll continue to see some of that roll off with the strong mortgage market, refinance market.
[Operator Instructions] Our next question comes from Tim Coffey with Janney. Please go ahead.
Jill, if we can get a - I have a question for you on some of the credit quality. So how do some of these hospitality gyms and retail loans cure themselves? You've identified them early, they continue to kind of be some of your trouble spots. So what's - how do these loans cure themselves?
Am I unmuted? Good morning, Tim. So what I will tell you about the hospitality portfolio is that on average in November, we were seeing an occupancy rate of 45% down from 60% in September. So they've deteriorated, but they're not all shut down.
And so, as you - as I indicated in my comments, it was 11% of the port - no 30% of the adversely classified loans are in the hospitality portfolio, but in terms, the overall portfolio, some of them are working well. The average loan size is $1.4 million, and so they can carry the larger loans have significant guarantor support often that carry them as well.
So while we have them adversely classified, expect the two-to-three year timeframe before they are back to normal operations. They don't have to get to normal operations to be able to service their debt from cash flow. We were - pre-pandemic had an underwriting 50% loan to value and north of a 2 times - 2.5 times debt service coverage. So, that's how they cure themselves. They can run lower. Our strong underwriting going in lets them operate at these lower rates and service their debt. We still say, there is risk.
Sure. Sorry, I didn't mean to cut you off there. So you saw a - it sounds like you're saying that these loans have runway to an improving economy which could be in the back half of this year?
Well, we'll see - the portfolio will see improvement in terms of occupancy because of its more rural base, and we don't have a lot of hotels that are downtown core business-centric. Those business-centric hotels will have a longer tail before they're back to any normal level of operation, but what I'm saying is that they don't have to hit what they were operating at to be able to service that. And they are coupled with strong guarantor support that carries.
Okay. That's very helpful. Thank you. Peter, how much is left to recognize in terms of fees from the first round of PPP?
Yes, I don't have exact number for you, Tim. But there is - we originally that - the entirety of that portfolio was worth about $40 million in fees and the amount that's been amortized or prepaid is probably something around $15 million of it, $15 million to $20 million, but I'll get back to you on the exact number, but I'd characterize it is in the $20 million - low $20 million range at this point.
Okay. And then, just kind of follow-up on your margin discussion earlier. Would it be kind of in a - would it be accurate to think that the margin could be a bit softer in the first half of this year relative to the second half given all the inputs?
Yes. As I mentioned, there are a lot of moving parts to the margin right now. The things that could influence on the positive upside from Q4 would be the pace of PPP loan forgiveness in the first half, that will be a positive to the margin to the extent that the forgiveness continues and accelerates from what we saw in the fourth quarter.
And then the other upside is that we see some of the excess deposit likely begin to move off the balance sheet, that will have an accretive effect on margin as well since we got a lot of that invested in short overnight investments.
The headwinds to the margin are going to be the pace of ongoing prepayments, especially the one-to-four mortgage portfolio or the CRE portfolio. And just, I'd call it a lesser effect just repricing on some of the term loans and the existing held for investment portfolio, but that effect is far less than the other. There are three items I mentioned at the beginning. So I think we're - I'd call it 50/50, right now, based on with any MX as to whether the margin is actually going to move up or move down in the first quarter. So I think there is equal odds that it could go either direction. I don't think it's going to be much different. But I think there is an equal chance of it being higher or somewhat lower than the fourth quarter right now.
Okay. And then finally Mark, on just kind of capital allocation, I recognize you have the regular dividend and the buyback in place, but we really haven't heard anything yet on a special dividend, and I'm wondering if that's something that you are going to likely to wait or Board could wait for, say, the second half of the year when you see things improving.
Well, I think as we've said before, we're kind of agnostic on the use of excess capital. We've done acquisitions, we've done share repurchases in the past, and we have done special dividends. So with the core dividend being stable, we're really looking at whatever the best opportunity is to deploy any excess capital and that's why we reinstituted the share repurchase authorization. So it's more likely, if you look at the share repurchases we've done in the past, they've been pretty economically accretive and that's how we're going to look at it going forward.
[Operator Instructions] Showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mark Grescovich for any closing remarks.
Thank you, Sarah. As I've stated, we are very proud of the Banner team as we continue to do the right thing, as we battle the effects of this COVID virus. Thank you for your interest in Banner and joining our call today. We look forward to reporting our results to you again in the future. Have a great day, everyone, and please stay safe.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.