Q3 2020 Banner Corp Earnings Call
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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 good morning, everyone.
I would also like to welcome you to the third quarter 2020, <unk> earnings call for Banner Corporation.
As is customary joining me on the call today is Peter Conner, our Chief Financial Officer.
Joe Wright, our Chief commercial credit officer, and return on 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.
Good morning good.
Good morning, our presentation today discusses banner's outlook business outlook and will include forward looking statements those statements.
Statements include descriptions of management's plans objectives or goals for future operations products or services forecast, what 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 most discussed today [laughter].
Information on the risk factors that could cause actual results to differ are available from our earnings press release that was released yesterday and most recently filed form 10-Q for the quarter ended June Thirtyth 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.
Our.
Thank you rich.
It has certainly been an interesting first nine months of 2020 and I Hope you and your families are well is we all battle, the cobot virus and Oh effects on our communities and the economy.
Today, we will cover four primary items with you.
First I will provide you a high level comments on the quarter.
The actions banner continues to take to support all of our stakeholders, including our banner team our clients our communities and our shareholders.
Sure Joe Rice will provide comments on the current status of our loan portfolio and accommodations, we have made to assist our clients and fine.
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 cobot virus on our clients.
I want to begin by thanking all of my 2100 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 is 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 your guidance.
I'm pleased to report to you that is exactly what we continue to do it.
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 one dollar and three cents per diluted share for the quarter ended September Thirtyth 2020.
This compared to a net profit to common shareholders of 67 cents per share for the second quarter of 2020, and a $1.15 per share in the third quarter of 2019.
This quarters earnings were impacted by the allowance of credit losses build based on the estimated impact of the cobot 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 pretax pre provision earnings and excluding the impact of merger and acquisition expenses corporate expenses gains in.
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, and an increase of 13%.
This measure I believe is helpful 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 <unk> 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.
He and advocacy through our responsive service model.
At that point, our core deposits increased 33% compared to September Thirtyth 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 new relationships again this quarter.
Reflective of the solid performance, coupled with our strong tangible common equity ratio, we issued a dividend of 41 cents 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 our drive throughs, ensuring our ATM to remain accessible and functioning and others performing.
Operational duties.
We have also created special programs for employees Dean Worksite essential and we're 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 SP, a payroll protection funds totaling $1.15 billion or 9103 clients.
And provided deferred payments or waived interest on 3370 loans totaling $1.1 billion dollars.
Also we have made an important 1.5 million dollar commitment to support minority owned businesses and our footprint.
It's significant contributions to local and regional non for profits and have provided financial support for emergency and basic needs in our footprint.
Let me now turn the call over to Rick NGL to discuss trends in the loan portfolio and their comments on banners credit quality Rick.
Correct.
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.
Deepened and expanded my understanding of the equity markets in general.
How each of you view the financial services sector.
Sector, and lastly, I would like to thank each of you for your interest in and support of banner.
With that I will pass the Mike towards to Jill as you were.
As you work with her I know you will recognize and appreciate her experience intellect and candor as I.
As I have over the almost 19 years, we have worked together thanks.
I can tell you without reservation that banners credit risk management and credit culture are in good hands.
My best to all of you and your families and associates and stay say as we continued to navigate the pandemic.
Gel.
Thank you Rick and good morning, before I review banners credit portfolio I would just like to take a minute to thank Rick for everything that is done to assist me in my career over these past 18 years, it seems impossible that it hasn't been that long, but as they take time flies working.
Working alongside Rick over the last two decades has no doubt made me a better banker because he has certainly wanted to the Bath <unk>.
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 has an even better humidity kind generous and respectful to all there is no doubt that he will be missed around here, Rick I wish you and George at near that happiness, and many great Adventures in your retirement.
And now before I get choked up let me review banners credit quality for the <unk>.
For the past two quarters, we have now does that our credit metrics did 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 shut down and in part by the various fiscal stimulus probe.
Before I update the details regarding our payment deferrals, let me make a few comments to summarize our September thirtyth <unk> metrics.
Banners delinquent loans in the third quarter increased two basis points over the linked quarter and represent 0.37% of total loans as of September Thirtyth. This.
This compares to narrow 0.30% as of September Thirtyth 2019.
Nonperforming assets continue to decrease in the quarter and now represents 0.25% of total assets a three basis point decline.
Nonperforming assets include nonperforming loans of 34.8 million and 1.8 million in Oreo and other assets the improvement in both categories continues to reflect the strong collection efforts by our special assets team.
Well the NPD metrics improved during the quarter the industry's most highly impacted by cold at night teams have caused our adversely classified asset metrics deteriorate.
We have shared our risk rating philosophy in prior calls and I will reiterate now that our moderate risk profile.
The early identification of credit concerns or what.
What that means in this credit cycle is that we are proactively downgrading credits that we have that we see having the overtones I'm a long term impact to the primary source of repayment.
Even if the borrowers are currently being supported by short term deferral or government stimulus or both in an effort to reflect the true the credit risk.
I loved September Thirtyth 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 they were offset by recoveries totaling 445000.
On an annualized basis. This represents a loss rate of nine basis points when fully guaranteed paycheck protection laws are excluded.
For the quarter the loan loss provision was 13.6 million down from 29.59 recorded during the second quarter. The provision in Q3 was driven by the increase in classified assets as well as the charge off taken during the quarter.
As we have noted most of the reserve build for losses captured early as we downgraded credits proactively.
As of September Thirtyth, our Hcl reserve now totals 168, or 1.65% of total loans up from 1.52% as of June Thirtyth and 1.11% as of September Thirtyth 2019.
Excluding both paycheck protection loans and loans held for sale. Our current Hcl reserve represents a significant 1.86% of total.
And I know that the reserve for credit losses provides a robust coverage at 482% of our nonperforming loans up from.
Up from 425% coverage as on the linked quarter.
Quarter over quarter, the loan portfolio reflects a 1.6% decline in total excluding TPP, though.
This decline is driven in large part by the continued rapid pace of residential so the car.
And the sustained low interest rate environment.
We had continued strong growth in the multifamily construction portfolio.
14% for the quarter and that's all a 31% year over year, excluding the Alta Pacific acquisition, which reflects our emphasis on providing affordable housing all across our footprint.
As has been discussed on previous calls banners approach to providing payment released the clients affected by COVID-19, and borrower specific and almost always wanted to 90 day increments.
Our ongoing portfolio review is continued to be robust and covered nearly 90% of the commercial and commercial real estate relationships.
These reviews have maintained focus on upgrading Bauer 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.
It is also important to note that her husband very limited number of loans that do not have personal guarantees providing tertiary support.
Looking specifically at deferrals on our early impacted cold at night.
I know, it's a follow up.
The 3370 loans totaling 1.1 billion that initially received payment really we currently have 379 notes totaling 240 million under active deferral or 2.7% of the loan portfolio net PTP.
The balance of deferrals have expired and clients are returning to normal as.
As of today, we have not seen any increase in delinquency or payment performance within those clients, who have returned to regular pace.
The 240 million active deferrals 273 notes totaling 79 million our operating under their first deferrals and I got six loans totaling a 160.4 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.
I will also note that commercial deferrals are roughly split 50 50 between interest only at Topia 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 had 73.5 million and hotel loans under active deferral of which 68.1 million our second round.
As a reminder, the hospitality segment represents less than 3% of our loan portfolio and currently 30% of the hospitality is underpayment really.
Recreation, then leader represents approximately 1.5% of the loan portfolio with 36 million under second round active deferral.
Last quarter, we reported that the recreational leisure portfolio was centered in fitness facilities, most of which were still close.
I am happy to report that that has changed with most facilities now open, albeit on a limited basis.
And our reporting demand for their facilities and services, 13% of our adversely classified assets are within the recreation and major portfolio.
The retail portfolio, which includes both investor and owner occupied theory as well as seeing I expose her 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 active deferrals as of June 30.
Yes.
Retail exposure, including both commercial business and commercial real estate loans represent approximately 13% of our loan portfolio.
Currently approximately 7% of our retail portfolio is adversely classified.
Recognizing that trends in retail commerce had rapidly shifted during the pandemic. This is the portfolio. We are watching closely I will reiterate what has been stated before that we have no more exposure the portfolio is diversified and 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, but 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 service. This portfolio represents approximately 2.5% of the law 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 significant lead reduced occupancy in them.
We continue to monitor this segment closely given the additional challenges associated with fall and winter months in many of our markets based upon reduced occupancy limit.
Approximately 3.5% of banners adversely classified assets are in the restaurant and food service industries.
Active deferrals in the health care portfolio have reduced to 2.1 million, 70% of which our second round deferrals.
This represents 0.4% of the health care 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, our health care 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 eyes.
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 sets 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.
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 one dollar and three cents per diluted share for the third quarter compared to 23.5 million or 67 cents.
Our diluted share in the prior quarter.
The 36% increase in per share earnings was driven primarily from a decline in credit loss provision expense core.
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.
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 TPP 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 Alta Pacific and PBP loans loans declined by 1.7% over the prior year quarter.
And in core deposits increased 326 million from prior quarter end due to a continued increase in overall client deposit balance liquidity.
Net new account growth.
And modest and a modest contribution from deposits generated from PDP loan proceeds originated in the third quarter.
Excluding the Alta Pacific acquisitions core deposits grew 29% over the prior year quarter.
Hi deposits decreased 127 million from the prior quarter, primarily due to a decrease in brokered Cds well retail Cds declined modestly.
FHLB borrowings remained even at 150 million to the previous quarter.
Net interest income increased by 1.4 million as continued growth in core deposits resulted in a 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 margin from the second quarter compared.
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.
The quarterly loan yield decline PPP loans accounted for 70 basis points and the remaining three basis point drop was the result of portfolio loan repricing partially.
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 four basis points to 27 basis points as a result of lower deposit costs, partially offset by an increase in wholesale funding costs arising from the 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, we did.
[laughter] due to declines in retail deposit costs, and a larger mix of noninterest bearing deposit balances.
[noise] brokered Cds accounted for one basis point of total deposit costs.
Fair to two 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.
Oh, the total decline the PPP loan program accounted for three 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.
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, well further growth in excess deposit liquidity will be muted.
Total noninterest income increased 500000 from the prior quarter non.
Noninterest income excluding losses on the sale of and charges and securities 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 and refinance volume declined to 44% of total production down from 58% in the prior quarter with overall gain on sales spreads remaining in the high 4% range similar to the second quarter.
Within this line item multifamily generated 1.1 million.
On gain on sale related to a bulk sale of multifamily loans in the second <unk> as the secondary market demands for these loans return to pre pandemic levels.
Miscellaneous fee income decreased 500000.
The declines in SP, a income along with a loss on other assets sold.
Total noninterest expense increased 1.9 million from the prior quarter exclude.
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 a reduction in recent medical claims experience and lower payroll taxes.
The credits are 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 impacted loan segments.
Acquisition costs declined 330000 from the prior quarter, reflecting the completion of the Alta Pacific integration and COVID-19 related costs declined 1.4 million as premium pay for essential workers and costs.
Working remotely decline.
As noted in the earnings release, we are closing 20 branch locations by the end of the fourth quarter and it.
And they 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 client adoption of digital service channels and the effectiveness of our teams transition to a remote work environment we.
We believe savings from a reduced branch network facilities travel and marketing costs will be durable beyond the pandemic.
This concludes my prepared remarks Mark.
Thank you theater, Rick in jail 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 to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then too.
The first question comes from Jeff Rulis of D.A. Davidson. Please go ahead.
Thank you good morning.
Good morning, Jeff dip.
Maybe I'll just follow up on a.
Peters comment on the on the branch closure just to kind of get a good day.
The dollar impacts do you anticipate any upfront charges and then maybe expense savings in dollars and as I guess the timing is that.
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.
I'm just kind of what what are the branches a profile that you are closing thanks.
Yes sure sure Jeff This is Peter yes, so the answer to that.
The first question and we do anticipate restructuring and exit costs around the 4 million dollar range in the fourth quarter that would cover the usual exit costs in terms of lease termination and write down on facility assets.
In sum severance related expense.
In terms of the timing of the of the benefits of those branch closures will begin to.
We'll begin to see them in the first quarter, albeit we'll see some of the benefits and the impact of some other cost initiatives lay in a later in the year and so in terms of my in our guidance we are.
We are we're 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.
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.
Support functions that will also see some lower expenses as we get further into 2021 in.
In terms of the the types of branches that are included in the 20, either they're generally we're not getting out of any markets. They're generally branches that are where we have solid presence in a given market and we're just reducing the number of branch locations in that market.
And as you know that that process of rationalizing our branches is always done in the context of.
Minimizing client in fact minimizing.
Deposit attrition.
And Ken, allowing us to continue to grow core deposits in the markets. We're in so they're all selected branches across all of our markets that meet those criteria.
Great. Thank you and Peter that the range bound margin.
[noise] characterization.
Any any further color I mean, it just in terms of the.
In terms of the sequential decline that we.
That we've seen.
Could you quantify is the range bound is that equally some upside to it it's a downside to that figure around 365 reported.
I guess, and I guess ex PPD or including PPP.
Impact.
Yeah, and then in that in the <unk>, but the context of that comment really are driven by.
The uncertainty of the excess deposit liquidity trajectory so.
We as of today, we we foresee that the PPP loan balances will will stay generally flat.
For the fourth quarter as the rules around SP forgiveness of the shifted back the timing of the prepayment activity in that portfolio. So we at this point for see that much of the forgiveness and acceleration of the processing fee related to prepayments will will benefit the margin Im afraid.
First and second quarter 21.
In terms of the fourth quarter.
The variable will be principally the level of excess deposit liquidity.
And what what where that goes if it stays more or less flat to the.
Third quarter, and the PPP loan balances stay stable.
We would expect you know a very modest very modest.
Very modest decline in the margin all things equal well have some good in a modest.
Modest core loan portfolio declined just due to natural repricing of term loans.
That will be partially offset with some continued declines in deposit costs. So the comments around range bound to really tied to the level of deposit liquidity.
And the PPP portfolio, which at this point, we think is fairly static we.
We have intentionally remain short and investing that excess deposit liquidity in overnight.
Funds.
Mix between the fed and some money market.
Balances and we're doing that intentionally due to the liquidity.
Potential volatility deposit liquidity, and then to maintaining optionality for higher yields as we go forward and further not risking any AOCI I losses down the road by taking excessive duration right now.
Yeah.
Got it okay. Thanks, Peter and Rick I appreciate all your help over the years, all the best at and T.
You and and look forward to joel'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, congratulation learning and brick certainly well deserved I'm just wondering if you guys can provide a little more detail on some of the underwriting behind some of the.
Some of the hotel property, even from the retail properties just ltvs, maybe backing these properties, but <unk>.
Certainly appreciate the reserve build that you.
Had so far this year and the proactive downgrades, but I'm curious on what you might have a protection the collateral behind that as far as underwriting is concerned.
Sure Andrew This is Joel 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 debt service coverage would have been north of 150.
On the hospitality the other.
The other category you asked for the office or you know we are we know held retail trade yeah, I guess some of that but on the other properties.
So so we tell a 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.
So okay. That's helpful, but I I thought I mean, you said you've been trying to get up to that property values and I can't imagine there too many transactions that are going on so it's hard to know where property values have truly gone but.
I mean, what have you been like when Youve been take.
Taking on this the with projects.
Project is have you seen.
Have you been lowering the property values, along with what you've been seeing going on you split that business activity.
You're correct there haven't been a lot of transactions, we haven't developed an internal model for bringing into the borrower's expectations for operation and just counting the loss revenue over that period of time, we think it will take time.
Hey, Tim return to normal stabilized operating value.
So across the board.
Coverages have you know may be gone from collateral at a 65% onto value to estimating closer to 75 to 80 on a couple of about the hospitality bumps we've looked at when.
When we look at the retail properties, we had a very strong.
Very strong rent collection and are not estimating any significant.
Finding value right now based on that.
Okay. That's helpful be no no just generally what are the what are your borrowers, saying about their businesses have have they been able to discharge.
This change how they operate I mean, obviously it sounds like more stressed hotel.
Hospitality area, but have they been able to buy this or just.
Just operating costs and and try to.
Try to consider ways to grow revenue in the midst of the pandemic.
Certainly that client by client, but yeah, there, they're shifting as they can weather, if you're thinking restaurants outdoor.
Outdoor dining ghosts kitchen.
Lingering EM ramping up delivery versus just the dine in operation and hospitality, reducing staffing and opening you know only certain floors things like that to reduce them out there. That's that's what they're doing what they can to.
To mitigate some of the reduced top line revenue.
Okay. Thank you for taking my questions.
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 or is I just want to echo the comments congrats Rick on your retirement and Jill I decided 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 what's yours you can get your thoughts on payoffs and Paydowns isn't the competitive landscape.
Where it should go.
Competitors are pricing things that just don't make it worth it or is it borrowers paying down a line and they just how how do you think about net growth going forward.
So David starting with the line activity, we haven't seen borrowers paying down their lines.
That much Lynette line usage is what it has been on average when we went into the pandemic. We would have expected it to increase maybe and we didnt see that either so that's running about average.
The decline in loan growth.
I said in my prepared comments is really driven by the low rate environment and the continued you know residential refinancing coupled with <unk>, we're seeing some.
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 the 2021 remained flat because of the pay off and then any loan growth in 2021, it's going to be based on.
In our view a sustained improvement in the economy, coupled with the development of a vaccine and overall improved confidence so I would expect that the loan growth that.
That picks up in the 2021 will be more back loaded as you know.
Has the commercial customers become more confident.
Okay. That's.
That's helpful. And then just following back on the on the branches no I guess, how how what kind of attrition do you expect with these I guess just given the current environment and a higher adoption of technology would you expect attrition to be kind of less than what you've seen in the past and and how has.
Attrition been on the on the recent branches that you've you've closed just curious any thoughts on there Oh and then just up what do you expect to earn back would be on the on the on these branch closures.
Yeah, David It's a Peter so yeah that you know that you know the branches as mentioned earlier that they they generally are are smaller balance locations. So they they in most cases, they are dilutive to our away for though in a retail organization.
And so they are typically smaller balance locations and they typically are relatively close to the next closest branch and so we you know we do expect some attrition, it's a little bit different by location, depending on what market. It is and how far away. It is from the next closest branch.
But its typically mid single digits type attrition assumptions on balance across the portfolio of branches were getting out of but they're also the also relatively small so it's actually a fairly small a total of our total deposit balances represented 2020 locations.
You know again, it's time in terms of pay back we don't we typically look at rather than pay back we look at the <unk> ongoing economic benefits to the company.
And the accretive value closing them post close exit costs. Most of these branches and other mix of owned locations and and lease locations. This this group that's going in the fourth quarter is more heavily on the owned side. So weve been included expectations for any losses on selling that real estate and they are in the.
$4 million as soon as I mentioned earlier.
Okay. That's that's helpful. I appreciate that and then just you guys have done a terrific job on the Darryl deferral front I mean, the deferrals have come down materially just curious your approach to to the second round deferrals. How are those conversations did you require any additional collateral or.
Her 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 where at that point take it's either not a cooler TDR in and work it out just curious your thoughts.
Okay.
So the general answer to that question is that whether it was first round second round or as we look into potential additional deferral. It. It really is a case by case specific and function.
Not only how that specific asset within our borrowers portfolio was performing at our global picture and what kind of support they can bring.
I was getting additional collateral certainly affairs collateral to get what we're doing what we can shore up some of that sometimes it's not really about collateral and it's working out a lot.
A longer time period to recap or so.
Well, we grant more it 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 governors.
Law 42, or four if that's real estate secured loans in Oregon that were impacted by cobot, but 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 Alibaba control.
Would be working out what would put them on nonaccrual certainly if we get to a point, where we think that there is a chance that we have lost in that they're not going to be able to service the debt with reasonable bank concessions or.
Her collateral sources were going to put it on non accrual take losses as we speak.
Okay understood. Thank you.
Again I have a question.
Pardon me again, what do you have a question. Please press Star then one the next question comes from Christine Bullen of KBW. Please go ahead.
Hi, Jackie Bohlen, I'm, not sure where the cooking came from hi, Good morning, everyone. Hi. Good morning, just wanted [laughter] just wanted to quickly I guess, a couple of clarification questions on the expenses on the bed frames.
<unk> are.
Are they in any way related to M&A.
Hi, Yeah, Jack its Peter No no. These are all he drove core.
Branches for us are not related to any.
Any of the prior acquisitions we've done.
Okay, and then some of them some of them have come from prior acquisitions, but they're not tied to any new.
New M&A activity.
Okay, I I had thought that all those had already been completed I just wanted to double check on that.
And then you had referenced a low to mid single digit percent decline in expenses when you use as the basis for that calculation.
Yeah. That's a good question that 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 <unk>.
2021.
Okay.
And how would you describe the process, we've gone through and looking at these expenses what I mean by that is high. So it's been a very thorough grabbing we keep up the different areas and really evaluated all the branches on or you know is this an ongoing process, where you maybe this might be the bulk of what you do but there could be.
The other incremental high cost saves in the future.
Yeah. This is that we've taken a a comprehensive enterprise review and that is and then in behind the numbers that I provided.
They will the timing and when when those costs.
Savings are implemented however are spread out so they don't all happened in a single quarter.
You know in addition to the branch closures. There's you know 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'll be kind of a slow ramp down to that baseline overtime and then as we go through that yes, there may be some additional opportunity.
Cities or or adjustments that materialize against that number that you know that will be a address that point. So I would characterize it as a it isn't enterprise efforts and but it will be scheduled out over the next six quarters and there may be some additional savings that materialized.
But we're not we're not committing to us at this stage.
Okay.
Thank you that's helpful. And then just lastly, a in terms of mortgage banking I'm, 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 you know the pipelines are still remarkably robust for this time of year is you know, 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 bigger.
Into the beginning of the fourth quarter, we do that being said, we do anticipate a slowdown.
What was a record third quarter for the company.
But we still see there's a lot of pipeline out there yet.
Out there yet to process that will carry.
Some of this additional volume all the way through Q1 so.
So we think the elevated level will continue, albeit at a lower level in Q4 and Q. He wanted before it really begins tapering down as some of the burn out around refinance.
Begins to take hold but we will see some decline, but we still see good momentum going into Q4.
[music].
Okay, and how about the gain on sale margin.
That that's still are holding up well, we as you know we said we're seeing gain on sales in the mid 4% range. You know that's that's likely to begin to come down a bit too it's been remarkably strong because of the demand and our ability to.
Throttled that demand with increased pricing.
So we think that gain on sale is going to come down a bit from where its been but it'll still be above our long term average.
Okay great.
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 Danny. Please go ahead Sir.
Great. Thanks, good morning, everybody.
First of all just Burton thanks, probably helped through the years and I wish you the best going forward as well.
If you know if I can start with kind of the deferrals.
The most out received a second deferral when do the majority of those happen.
So that's been a moving target as well Tim first differ old stuff and in March and you know continue to come on throughout that first quarter and even into second quarter and so some of the second deferrals people went back payments and then.
Come back and CAD, Alright, I made a couple of payment, 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 come back and requested deferrals.
So it it's a moving target.
Yeah, Okay short answer [laughter].
Okay. Appreciate that and then the the length of the deferral period of those still 90 days are just stretched about to 180.
Oh, no by and large all of our the girls first or second we're limited to 90 days. So that we could be a stuff get more updated information and make another informed decision as to what to do that second.
That second half.
Okay makes sense.
And then is there a commonality among the hotels that received a second deferral is there a a common trend among the group.
[noise] Barry reduced occupancy more of the.
We're being centre hotel.
So.
So significantly reduced occupancy would be the trend par.
Deferrals.
Okay all right.
Okay.
Yeah, you said those when we're in urban areas.
Yes.
I'm just kind of general question about you know given your footprint the different states Escher and have have the restrictions on business activity that those different states so significantly impacted bowers.
The last couple of months.
As the <unk>.
Business activity significantly impacted borrowers.
<unk> Oh.
Oh, just know that.
The restrictions by the different states that you operate in.
Right, where I was going with that most of them have pulled back. So we're in phase two and three in most of our states. So economic activity is picking up and so to that regard its benefiting Carla.
The the question becomes what happened in <unk> as we go into the fall with the virus.
Right and then you know associated pull backs.
Okay.
And Joe some of the comments you've made on the call today trying to make it sound like the demand shock that we're seeing right now it could be temporary and that you know there's money on the sidelines vaccine develops do things started to turn the getting better in terms of doing with kids with cobot that all that money could come back off the sidelines.
And start you know getting.
Getting back into the economy.
D. is that is that accurate and does describe how you're feeling accurately.
That is 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's more pulled off before now.
<unk>, making that kept the capital investments that were maybe keyed up.
Before we went into cold at night.
Okay, and the demand shock isn't isn't unique to ban or 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 to the sidelines.
I'm just wondering that if this does this uncertainty does continue through the end of this quarter. So maybe loan growth could be lower than what you guys have been talking about.
If that's possible.
Well, we have been saying that for 2020, our loan growth is going to be flat and I think that's where we'll be.
So were slightly down 1.6% I think it was.
Year over year.
And driven primarily by that residential repaint and so I think you know we're going to be flat the 2020, and we'll see some pick up in it in 2021.
Later in the year.
Okay, Great I appreciate it those are all my questions. Thank you.
Thank you Tim This is Mark let me just say that you know what we're seeing in the pipeline book as it relates to commercial demand is.
It's it's not deteriorating farther so it's kind of plateaued.
Which maybe.
Maybe a harbinger for more activity going into 2021, if there's some resolution to some of the items that gillett 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.
As I stated, we're very proud of the banner team as we continue to do the right thing as we battle is cold virus I 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 as we look forward to him enjoying his retirement into 2021 and thank you again for your time 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.