Bank of Marin Bancorp

Good morning and thank you for joining Bank of Marin Bancor's earnings call for the fourth quarter and year ended December 31, 2020. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. At that time, if you have questions, please press 1 followed by 4 on your telephone. If at any time during the conference call you need to reach an operator, please press star 0. This conference call is being recorded on January 25, 2021. Joining us on the call today are Russ Colombo, President and CEO, Tim Myers, Executive Vice President and Chief Operating Officer, and Tawny Gertin, Executive Vice President and Chief Financial Officer. Our earnings press release, which we issued this morning, can be found on our website at bankofmarin.com, where this call is also being webcast. Before we get started, I want to emphasize that the discussion on this call is based on information we know as of Friday, January 22, 2021, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release as well as our SEC filings. Following our prepared remarks, Russ, Tim, and Tawny, along with Chief Credit Officer Beth Reisman, will be available to answer your questions. And now, I'd like to turn the call over to Russ Colombo.

Thank you, Andrea. Good morning, and welcome to the call. Bank of Marin generated strong results for the full year despite the pandemic-remated shutdown of large sections of the economy in 2020. We adapted quickly and provided loan relief, payment relief, to borrowers who needed breathing room to assess the pandemic's fallout. We also actively participated in the Small Business Administration's Paycheck Protection Program, helping almost 2,000 local businesses secure PPP funding and providing them with guidance and access to apply for forgiveness. Our credit quality held firm throughout the year and is solid as we move into 2021. We continue to work with clients affected by what we hope are the latter stages of this public health crisis. Most of our commercial clients are in a position to manage through these final months. And many have found new ways to deliver their services and move their businesses forward. With strong capital and liquidity positions, we're a team ready to fire on all cylinders. We believe we enter 2021 well positioned to take on the year ahead. Our 2020 results demonstrate this. Let's start with the highlights. Our income for the full year was $30.2 million, which represented a return on assets of .04% and a return on equity of 8.6%. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.22. The new earnings per share were $2.3 billion at 12-31, 2019. Managers' Baron deposits increased $226 million in 2020 and made up 54% of total deposits at year end. Cost of deposits remained low at 11 basis points for the full year of 2020, down from 20 basis points in 2019. Manicure loans represented only .44% of the bank's loan portfolio as of -31-2020. Given the bank's capital position and solid 2020 results, our Board of Directors declared a cash dividend of 23 cents per share on January 22, 2021. This represents the 63rd consecutive quarterly dividend paid by Bank of Maine-Bancorp. In October 2020, the Board reactivated the $25 million share repurchase program that was suspended in March. Repurchases for the full year 2020 under our current and prior repurchase programs were 203,709 shares totaling $7.2 million. In December, we announced the retirement of Jim Burke, Executive Vice President and Chief Information Officer, and named Rich Lewis to succeed him. Jim was an invaluable member of our management team for almost 10 years. I have the utmost confidence that Rich, with his extensive knowledge of information security and technology and deep local banking experience, will continue to keep Bank of Maine competitive in this constantly changing digital world. Tim will now provide an update on our loan modification program and PPP.

Thank you, Russ. Bank of Maine provided payment relief for 269 loans totaling $403 million since the onset of the pandemic, most of which have resumed normal payments or have been paid off. As of December 31, 2020, 14 borrowing relationships with 29 loans totaling $71 million had requested additional payment relief. Nearly all of these loans are secured by real estate with an average loan to value of only 40%. Almost one half of these loans are in the education and health club industries. The remainder are largely loans on office buildings with COVID-19 impacted tenants, hotels and hospitality, and commercial properties with retail tenants. During 2020, as Russ noted, the bank successfully helped almost 2,000 companies obtain funding through the SBA Paycheck Protection Program. All are now able to apply for forgiveness through secure online portal and our expert team of bankers is available for ongoing support and training. The bank has opened its application portal for the second round of PPP loan funding and we are now accepting loan requests from our round one borrowers as well as existing customers that now need funding support. Due to the success of the first round of the program, the ingenuity of our small business customers to adapt during the pandemic, and an overall recovery and economic momentum, we expect demand for PPP loans in 2021 to be lighter than in 2020. However, we are prepared to assist any of our customers who have benefited from participating in the program this time around. We remain optimistic about new growth opportunities in our San Mateo and Walnut Creek offices and continue to make key hires to position ourselves for ongoing growth in our other markets. Remaining true to our commitment to relationship banking in 2020 allowed us to adapt business as usual to new realities while we continued to develop strategic opportunities to expand and grow our businesses. With that, I will turn it over to Tani for additional insight into our financial results.

Thank you, Tim. Good morning, everyone. During a very challenging year, we remained true to our disciplined fundamentals. In addition to our solid credit quality and robust capital position, our low-cost deposit base provides strong liquidity and our diligent expense management supports ongoing profitability. As Russ said, we produced net income of $30.2 million in 2020. Net interest income of $96.7 million grew $1 million over 2019, primarily due to growth in PPP and commercial real estate loans as well as lower funding costs. Non-interest income of $8.6 million fell $534,000 from 2019, primarily due to reductions in overdraft and ATM fees, bank-owned life insurance income, fees on deposit sales to third-party networks, and dividends on federal home loan bank stock. Higher net gains on the sale of investment securities partially offset those declines. Non-interest expense of $60 million in 2020 increased $2 million over 2019. The increase was primarily attributed to $1.4 million higher provision for unfunded loan commitments and $800,000 more occupancy expenses made up of a lease renewal on our headquarters, the opening of our San Mateo office, large common area maintenance true-ups, and elevated janitorial costs associated with the pandemic. While salaries and benefits overall were relatively unchanged year over year, annual merit and regulated cost increases were mostly offset by SBA PPP deferred loan origination costs. Now turning to our fourth quarter results. Net income was $8.1 million in the fourth quarter of 2020 compared to $7.5 million in the third quarter and $9.1 million in the fourth quarter of 2019. Diluted earnings per share were $0.60 in the fourth quarter of 2020 compared to $0.55 in the prior quarter and $0.66 the same quarter a year ago. For the quarter ended December 31, 2020 return on assets was .09% and return on equity was .98% compared to .98% and .37% in the third quarter. Net interest income totaled $23.6 million in the fourth quarter of 2020 compared to $24.6 million in the prior quarter and $23.9 million in the same quarter a year ago. The decrease from the prior quarter related to lower PPP fee recognition due to the extension of the first payment due date on those loans as well as lower earning asset balances. Conversely, prepayment penalties on commercial mortgage backed securities increased the yield on our investment securities. Now I'd like to discuss the new accounting standard related to credit losses commonly known as CECL. Earlier this year we postponed the adoption of CECL under the optional accounting relief provisions of the CARES Act. During the first nine months of 2020 we applied the incurred loss method in determining the allowances for losses and recorded a $5.5 million provision for credit losses and a $610,000 provision for losses on unfunded loan commitments. As of December 31, 2020 we adopted the CECL standard increasing the allowance for credit losses by $748,000 and the allowance for unfunded loan commitments by $1.1 million. These amounts represent the difference between allowances calculated under the CECL method as of December 31, 2020 and the incurred loss method as of September 30. Adoption of the new standard occurs in two parts which is laid out in the table on page three of our earnings release. The first component is a cumulative transition adjustment to retained earnings representing the difference between reserves calculated under CECL and incurred loss as of December 31, 2019. Cumulative transition adjustments of $1.6 million for credit losses and $122,000 for losses on unfunded commitments were recorded in retained earnings and totaled $1.2 million net of taxes. Second, the $856,000 provision reversal and $960,000 provision for unfunded commitments bring the ACL and allowance for losses on unfunded commitments to their December 31, 2020 CECL levels. And now if you're still with us let's look ahead. Our strong capital and liquidity positions present the opportunity to eliminate a high cost funding source and we have decided to redeem our remaining $2.8 million, .85% trust preferred debt in the first quarter of 2021. The redemption will consist of a $4.1 principal payment, quarterly interest due, and $1.3 million in accelerated accretion of purchase discount. In closing, Bank of Marin continued to build new capabilities and delivered solid performance during a year of many changes. We enter 2021 confident in our ability to navigate the remaining stages of the pandemic and shift into growth mode when we transition to a post pandemic economy. Now Russ would like to share some final comments.

Thank you, Tawny. 2020 brought us unprecedented challenges and was frankly a really tough year for so many. I am very proud of the bank's accomplishments. Not only did we deliver for our shareholders, we also served our customers by making sure they had seamless access to all of our financial services, whether in the trenches or via our digital platforms. Over our 30 year history, Bank of Marin has never lost sight of our commitment to strong credit quality, robust capital and liquidity, first rate customer service, and a dedication to the communities we serve. All of these are bound together by the hard work of our team and I want to thank them for their unwavering commitment to our mission. Looking to the year ahead, we anticipate the return of robust M&A activity as the industry adjusts to a new normal and more community banks look to pair up to gain scale and geographic reach. With our capital position, strong share price, and proven history of successful acquisitions, we're confident we have the resources, currency, and experience to emerge as a buyer of choice. We will continue to assess potential opportunities as they arrive. Bank of Marin is well positioned to weather the remaining months of this pandemic and is poised for growth alongside our customers in 2021. Thank you for your time this morning and now we will open it up to answer your questions.

Good morning and thank you for joining Bank of Marin Bancorp's earnings call for the fourth quarter and year ended December 31, 2020. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question and answer session. At that time, if you have questions, please press one followed by four on your telephone. If at any time during the conference call you need to answer, please press star zero.

Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-time prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Questions can also be submitted via the webcast page by clicking the ask question tab and typing your question into the box that appears below the tab. Again, to register for a question over the phone lines, please press the one followed by the four. Our first question comes from the line of David Seastore with Raymond James. Please go ahead. Hey, good morning everybody.

Hello David. Morning. You guys talked about being positioned for growth, which is extremely encouraging. I just was curious, how do you think about this and your ability to grow going forward? What's your time frame? When do you think you may see origination kind of normalize and where are you expected to see the most growth? I think we are positioned well because we have two commission-making offices. We have a new one in Santa Cruz and we have a brand new one in San Mateo. So those are going to generate opportunities just because there's new markets there. So there's going to be opportunities. In Santa Rosa, we have a manager there who's got a very strong focus on the wine business. Historically, we've done a lot of business in Napa, but we're also well, we've been shifting a lot of our focus to this tonoma kind of wine business. So I'm thinking we're going to see a lot of activity out of there. The other issue is that being the kind of manager, it's really a tough time for the growth as we all can assess you. So I think as we come out of this, our offices are all in terrific shape, credit-wise, credit quality-wise, and our members are kind of ready to go. I'm really encouraged by good results we've had out of Oakland and also in Nevada. I'm very confident that as we come out of this, we can actually go out and see a client and see a prospective client, we're going to do really well because we're very relationship-based and it's really important to be in front and center with the customers. This last year almost has not allowed us to do that very much. So I'm confident and encouraged as we go into this new year. Okay, that's helpful. Kind of maybe just following up on that, could you maybe just talk about the competitive landscape? Obviously, payoffs and pay-offs have been a real challenge. Just any comments on the competitive landscape and then maybe when you think you can return to this kind of growth and kind of get back towards the -single-digit growth that we're kind of used to? Is that a back-up of the year kind of story or anything? Sure, sure. I'll comment. I'd like to trim my results a bit. I need to jump in after I finish to talk about the competitive landscape. It's probably later in the year, whether that's late spring or early summer, I think that's when we really are able to get back to A-more, no more. Here's a note that's going forward. But I think that's the point. As far as the competitive environment, margins of question is very real. We continue to see bags-out making offers of very, very low rates for pretty long terms. So that's the challenge, to maintain margins and get the volume also. That's the balance of what we have to do as an organization. Lynn, can you answer that?

Yeah, thank you, Russ. Good morning. Russ really hit everything. I wish I knew the magical answer to your question about when exactly, but we're a relationship commercial bank. We're not a transactional under, so as Russ said, it really requires us to be out in our markets, talking people into giving us an opportunity to bank their business, bank them personally, to take business from other banks. In terms of the competitive landscape, we are seeing a lot of very aggressive banks. We are seeing competitors in the market come in, -3% financing on real estate, chasing deals out of their market. If you look at the payoffs we had during the year in 2020, there were third-party refinancings with significant chunk out of non-bank lenders, interest-only, -recourse-type financing. So we continue to be selective in the kind of deals we'll do. That has really put us in the credit position we're in to withstand this, and we will continue to have that kind of discipline. We are looking in every market, back to your question of how to do this and generate growth and the absence of being able to go out and see everyone like they normally like, through virtual events, which you've been marketing very busy and trying to plan lots of mixers and client or prospect events. That includes, we've talked about the wine industry focus. That group also focuses on the Central Coast, and so that requires some creativity as well. We do have someone down there, but it's just finding ways to get out in front of people or be in front of people and be able to do what it is the bank seller has done. We also have made some key hires in some of these markets. Russ mentioned that new manager. We have the new manager in Oakland and some other key positions we've filled. We have the new San Mateo office and our Walnut Creek office, while primarily they have been our PPP loan origination shop. Really, our full staff and we're starting to hit their stride before the PPP, you know, the pandemic and the PPE process started. So I think if you put all those things together, we'll position. I don't know when that magical date is though that all clicks. Yeah, that's

understandable. And then, and that's helpful, Colin. Thank you. And then just shipping gears. I just want to get your thoughts on asset quality. Obviously, you've always been a tremendous underwriter and maintain

a really conservative credit culture. Just wanted to get some thoughts on

the migration train, especially within the health club and the hotels. Was this kind of a clean up quarter or do you think there could be some additional migration? And then just how do you think about the loan reserve ratio under CSOL? Is this kind of 110 to 120 basis points about the right level going forward? I'm going to make a couple of comments and I'm also going to ask Best Rises, who's our QCredit Officer, to jump in with comments about CSOL and credit quality. We have a couple of health clubs. If you have health clubs, they're not operating right now. The Bay Area, California in general, has been shut down. And so the good news is we have real estate on two health clubs we have and the loan devaluations are very low. Health totality in general is tough right now. It's tough. There's a time when the hotels are back open and they were operating again and the health clubs were doing things outside. But we've kind of gone into another shutdown in California so it's been more difficult. But long term, again, once we get to where we operate at a more normal time, I'm very confident that we will, even these challenged credit industry and because of the COVID shutdown, we will respond appropriately. Maybe Best can chime in on that.

Sure. This is Best Rises. I'm the Chief Credit Officer. And as Russ said, this is certain industries where I wouldn't call it a cleanup at all. These were credits that we were watching that we kind of identified if the surge was to be a second surge or the pandemic was prolonged, but these are the ones who might have more difficulty just based on the nature of their industry, hotel, recreation, the hospitality industry. That said, at this point, based on our payment relief program, just our normal portfolio monitoring, I think we've identified any significant credits that we expect to have issues. There can always be some small ones, but again, these are ones that we were watching. So it was not a surprise when we classified them one on one. Okay.

That's

helpful.

Thanks, everybody. Thank you.

Our next question comes from the line of Jeff Lewis with D.A. Data Center. Please go ahead.

Thanks. Good morning. Hello, Jeff. Hello, Jeff. Take a look at the margin. Looks like the incremental, I guess, negative impact on margin through PPP of an increase of nine basis points to the negative. Get your recorded margin down for suggesting some core strength there. Interested in your views going ahead if we include the sub-debt redemption and possible impact. Big picture, just what you're seeing on the margin. I think Russ, you alluded to this as obviously a thought or a factor when you're booking new growth or the competitive landscape, but seems like the margin's firming up and maybe some more help to come. Maybe if we color those comments to XPP, that'd be great.

Sure. I'll let Tony talk a bit about the margin. It's challenging. At this point in time, you've got an interesting environment that's going to be there for a long time. Until you have historical loans as they get paid off, then if they're replaced by new loans, you're probably going to get margin-free question out of that. I'm sure you want to do everything you can to maintain your portfolio, avoid payoffs. Being a relationship bank, I think the important part of that is to feed out your clients and being in front of them. Relationship banking is the key to maintaining margins. As we come out of this, our lenders are going to be very busy because they're going to be outfueing everybody. Making sure that we're taking care of our clients needs, making them understand the financing requirements so that we can address them appropriately as we go forward. We try to do that by phone, by Zoom, things like that, but there's nothing better than actually going out and sitting down with your clients and understanding what's going on in their business. That's something that's taken a bit of a hit, I suppose, for everybody, for us because that's how we focus our energies and marriage and relationships. I'm confident as we come out of this that that will improve. But Tony, you can comment a bit on the margin numbers.

Okay. Good morning, Jeff. You hit the nail on the head with the PPP fee recognition extension being part of the issue this quarter. I do want to emphasize that that was somewhat offset by an increase in our securities portfolio yields because we did have some commercial mortgage-backed securities with yield maintenance, prepayment penalties, prepay. We did get the benefit of those prepayment penalties. But that does speak to the strength of the investment portfolio as well. We were involved in the agency-backed CNBS securities fairly early on and built up a pretty significant position in that. That does help in times like this, but that did make a difference this quarter in particular. We trust preferred redemption, as you said. It'll be a drag for sure in the first quarter because we've got a lot of accelerated discount accretion to absorb here. But then going forward, as Russ said, we're doing everything we can going forward to help the margin. That should be a contributor in that regard.

Okay. Thank you. Just my other question. Russ, I wanted to circle back your kind of wrap-up comments on the M&A side. You're active on the buyback and just wanted to make sure I understand that you really could do both for the balance of 21. I mean, the fact that you're active in buyback doesn't necessarily mean you're out of the M&A market or you'd probably wean off that if some opportunities come about. Just kind of weaving those two together would be helpful.

Yeah, I mean, if we continue to buy back, that's been the plan. And we think there are good opportunities for us to buy stock back, which is because we still feel like my stock is of great value. At the same time, if there was an opportunity for M&A, and obviously we would like to put the buyback on hold if that happened. I really think if I talk to the investment bankers and everybody on the stage, this is the one person say to me, one investment banker, say, this is the busiest we've been in a long time. So that means there's lots of conversations going on out there. I don't know where they are, but things will start to present themselves, I'm sure, in the future. So I'm confident that stock prices have fired up quite nicely. And the bank's credit quality position in deposits, crowd size are so strong that we're very attractive acquirers to banks that might want to part it up. And for all of them, we're out there talking to everybody and see what presents itself in the future. And I'm confident that 2021 will be a big year for M&A in California. Great. Thanks, Rust and Tonny.

Our next question over the phone line comes from the line of Matthew Clark with Piper Sandler. Go

ahead. Good morning and thanks for taking the questions. I just want to get back to the reserve related question that .27% X PPP and acquired. How should we think about that ratio in a post-feecehold world and where it might bottom? And as it relates to that, maybe a good way of looking at it would be just the weighted average rate that you're setting aside on new production of weight.

Matthew, Beth Risen and Tonny do answer that one. So that's the first step, I suppose.

Exactly. Tonny, why don't you start and then I'll fill in. It's a little bit more of an accounting question. Okay, sounds good. So

Matthew, good morning. The .27% as of December 31, there's even though it excludes acquired and SBA PPP loans, because we're in Cecil right now, acquired loans are actually under Cecil part and parcel of that ratio. So it's really just the difference between the 1.10 and the 1.27 is really simply the PPP loans. I'd say that we have qualitative factors, if you will, or qualitative considerations that take into account the volatility of forecasting and the sensitivity of the model right now in order to make sure that we don't, as we continue on with this process over the next several quarters, we don't have huge swings back and forth. So really just trying to digest. So we have, as I said, some factors in for that to make sure that we have ample reserves, and we can decide what the forecast, how we might change, or how the model might respond, just while we get used to the model.

I'll add on that. The difference with Cecil is there is a significant forecasting component. As forecasts improve, that ratio could go down. We would expect that.

Okay, understood. Thank you. And then can you remind us how much you have left in the way of net PPP related debt interest income?

Yeah, let me pull that number. And you want for the quarter or the year the

total PPP? No, remaining. Just want to make sure our numbers are in the ballpark for what's left that you'll realize in revenue, not just for the one of the PPP.

Oh, the remaining fee income that we have to recognize?

Correct. On a net basis. I mean, we have our own estimate, but I just want to make sure we're not off.

Okay. Yeah, let me pull that number. I'll come back to this in just one sec. Okay,

no worries. And then, oh, geez, I was going to ask another expensive question, and I know Tony here is looking for that number. Maybe just on the M&A fund, Ross, can you just remind us what the types of potential targets you would like to consider and your pricing criteria?

Well, historically, when we've been over in the Bay Area, that's not to say that that would always be the case. And the Bay Area, there's really, while there are still many bikes in the market, the number has certainly shrunk over the years. And when we were pretty disciplined about the way we operate, and there's a number of metrics, obviously, that are so important, you know, earn back how many years, and sleeping in them is four years, certainly, and having a fee of greater than the first third year, that's very important to us. And being a market that we think that has either, when the markets are operating, continuously, or as we view as a good growth market, and, you know, we've been even clear about looking at the possibility of going south and all the potentials are released. It's just we have as a community, it's really important, I think, as we look forward that with margin compression and radios, size definitely matters. And being bigger, and being able to spread your space over larger base, is really important. It's going to be more important as we go forward. I mean, I don't see a lot of change in the intrastate environment over the next few years, for sure. And so, if you can't, if you're getting relatively low margins on the control rate, then you have to be very cognizant of the expenses. We as an organization have always been very, very careful about expense control and doing what's right to maintain our resources. But, you know, you look forward in the future, that's going to be, you know, it's going to be important to spread all the larger base. And so, that's why I think M&A is going to be going to be based on a lot of activity. And, you know, we are interested in participating in that. Great.

And then maybe just on the expense outlook, Honey, if I may, you typically have a seasonal increase in the first quarter, but you also had a pretty big increase in the reserve for unfunded commitments. I mean, is it fair to maybe assume that the runway remains relatively flat with that seasonal increase, kind of offset by maybe some of the leasing, reserving for unfunded commitments? Let me just lower from here for the rest of you.

You know, I don't know about the release of the unfunded commitments. I mean, you could, you can always see some shift between unfunded commitments provisioning in the non-interest expense line and then the provisioning for allowances on credit losses in the other line. So, can, you know, shift back and forth depending on how the usage of commitments goes. So, you could have some fluctuation there that would lower expenses, but it might also, you know, serve to increase the provision. So, I think when, you know, when Beth was talking about where the overall provision is going, I think she had both of those in mind. We typically have, as you said, a lot of noise in the first quarter. The 401k contributions due to the year-end resets and also the bonus payments, that tends to be a pretty significant item. Additionally, we have, we calculate our bonuses for 2020 in the first quarter, and that's that's a number that is, you know, has yet to be determined. And we have accrued bonuses that are fairly tri-level. So, we typically have some true up in the first quarter around that as well. So, I'd say expenses in the first quarter, you know, yes, you're going to have a lot of different directions and some pretty big ticket items. So, I think you're right about that. You know, and then going forward for the rest of the year, obviously, as we are able to get back to business as usual, engage with our customers in normal fashion, you're going to have more expenses that we weren't able to execute on in 2020, associated with that. And additionally, we have, you know, frankly, some things that got moved from 2020 into 2021 because, you know, we had to focus on the pandemic response and some of those other activities had to be moved. So, I think it's a great question because there's a lot of change and it's going to be a transitional year. Back on your PPP question, we have 5.4 million more in fees to recognize in 2021 as those loans are forgiven. Okay, thank you.

Our next question comes from the line of Jackie Boland with KBW. Please go ahead. Hi, good morning, everyone. I just want to just start off with a housekeeping question before I get into some more theoretical items. Just given the adoption of Cecil, the ,874,000, I want to just verify that that's associated with loans only or if it also includes the allowance unfunded commitments and it's the total ACL.

The $22,874

,000 is the ACL, which is loans and securities only. The unfunded commitments go into a different line item. Okay. So, the total reserve on the unfunded commitments is the $1.1 million.

Okay, thank you. Different things have different terminology that I don't like to automatically assume. Thank you. And then just next, this one might be for you, right? Just thinking broadly about the pushes and pulls which are going to have this year. You know, under the assumption, which I think is fairly consensus, that we're going to be in what our new normal environment looks like in the latter half of 2021 and your bankers can meet with their customers face to face. You've got loan board kind of moving forward. How are you thinking about balance sheet fluctuations through the year? Also taking, you know, you have some very active advantage in your deposit book and liquidity flow. So, just wondering how you're thinking about that at the end of the year and through it?

So, when you say balance, you mean growth in the balance sheet and growth from the standpoint of loan total in the case of that nature?

Just overall balance sheets and whether you view loans or deposits as the larger driver of the stock, speaking of the size.

Oh, okay. The deposits have been a growing expansion over this past year. I believe that we get back into a more normal fund, that's going to change. At the end, you'll start seeing businesses really starting to be investing lending opportunities. So, if I had to make a prediction, I would suggest that loan growth will occur more than one hour half of the year. The policy growth will either continue to grow or maybe stay flat. Maybe continue to grow slightly through this year, but then it may flip flop because I think that you will see more reinvestment. You will see more businesses opening up that haven't been operating. So, it's going to be a… Last year was a very safe year. This year will be maybe not equally safe, but it will be the first half. A lot of our customers are struggling with particular things in hospitality as we talked about. They're struggling, but we hope that we can get through this period and get to the time when we start to open up, and then we'll start seeing the lending opportunities. Also, we're still going to see how commercial real estate will be at. Because I think the big question now is, is a lot of people working from home. Will they all come back to the office? Will there be a lot more people working from home? And I think that that's… I think it's probably a hybrid. I think that what I talked to, most people are anxious to get back to the office. So, I think you'll see that. But I think there will be an equilibrium that will reach later in the year where businesses will have a portion of their employee base working remotely. Because we see it does work, but the risk… If you look at it from our perspective at the bank, the biggest risk for everybody being remote is the culture. And I think culture is very strong. And it's important that we have our employees together because there's so much value to being able to work closely with our fellow employees in person, which should just use something when we're remote. And so, I think a lot of businesses will be that way as well. We're going to see what the first half of the year is going to be. We'll see what's going on. And then the second half, I expect we'll see the CSO return to a more normal. That's kind of my thought.

Okay. Thank you. That's a great call. And I think you

have any… Sorry. It's fine. Going back to your provision on off-balance sheet, the 1.1 was the provision for this quarter. But I think it's ,779,2779. Great.

Thank you. You're welcome. And just one last one for me then. I just wanted to see if you have any preliminary thoughts of the pushes and pulls between normal fees and our trends in deposits versus adding additional PPP loans in the quarter and how that might impact the overall portfolio. So, deposits, not loans.

Well, I think what you saw in the PPP first thing that was that there was a tremendous inflow of deposits. So, all the PPP loans are made. They go on those accounts. And we assumed that they would just go away as they were used. But we haven't really seen that. It's difficult to separate the PPP deposits from normal. But I think there's kind of a combination of that. Businesses are limited. Businesses primarily are accumulating deposits, accumulating cash, and we see that throughout the year. I think that will happen again with this new round of PPP. But it's clearly not going to be as big of an event as the first time. While we have had… And Tim, maybe I could have you jump in and talk a little bit about PPP as I finish. Sure. We haven't had the numbers application for the dollars. So, maybe Tim, we could add you that on the PPP.

Yeah, of course. And if you don't mind, I'll go back a second, Jackie. I think this addresses some of this in your prior question. One of the things that's affecting us is borrower behavior and conservatism in this environment, especially with our client base. Our utilization on credit commitment on revolving credit goes down significantly, you know, five points from 38 to 33, not average, but year over year. And we continue to see… We saw some PPP proceeds pay down loans, just like Russ said, they increase deposits and cash is fungible. And that gets really hard to pull apart. But, you know, 11 million of our payoffs last year were just dollars applying cash. So, right now, that's a very conservative mindset that, to your question before, as we… And as momentum picks up, that's an immediate gain to our balance sheet on the asset side. In terms of new PPP loans, we, as of this weekend, have about 600 applications that we're processing for about 78 million in hurdles. So, that's, you know, our average loan on the first round is about, just north of 170,000. This one would be about 130. They're still coming in. But I think overall, we're estimating maybe between 50% and 75% of the number of applications of last time, but maybe half of the total dollar outstanding, with a significant number in that 150,000 and below with the new expedited costs. While the government's rolled out the form for that, they're not able to accept that. We expect that to both speed up the forgiveness process from one borrower's, because 70-something percent of our borrowers were under that amount the first time, and it will be a higher percentage this time, probably closer to 80%.

Great. That's incredibly helpful. Thank you, everyone. I appreciate it. You're welcome. And our last question in queue is coming from the line of Tim Coffee with Johnny. Please go ahead.

Great. Thanks. I just had a quick follow-up on the health club loan and the two hotels. Do you see the loans having a pathway to curing themselves in that they just need a little enhanced monitoring right now, or is it just too early to tell? I can answer that. They'll have the best, you know, she's been very involved with this. You know, it's clear that, you know, nobody's, I mean, they're shut down. So do I see a chance for them to recover? Yes. I mean, as soon as we get back to where people go to gym, then, you know, I think the credit cards will have an opportunity to write themselves. It's just, you know, it's a lack of business. I know that there is some outdoor activities that they have, and they have, you know, done that, but it's still pretty tough. So the other question, I've seen lots of discussions in the news and, you know, health clubs are stuff with all over the country. What will they look like after COVID? Will people just go right back to that or will they change? So I see it halfway out. We have a really strong fire base, but I'm confident we can work through this. And then, you know, you can ask the coordinator that too.

Sure. All of these credits were struggling, but they were doing better once they were able to reopen after the first shelter in place. But again, that's why you saw our classified and non-accrual increase in the quarter. It was the second event that really made it difficult for ones where the guarantors were helping, et cetera, or they had less participation or less occupancy in the past, but they were able to continue. So I do definitely see a pathway out. It's not just that we have low loan to value, so we're not concerned. We do see sponsorship behind these credits, and in the case of the hotels, they're also readying them for occupancy in the future. Some have been used by emergency workers or the homeless during the pandemic, and now they're reverting back. But it'll take time, and they do need the economy to reopen. Same thing with the health clubs.

Okay.

Well,

the rest of my questions are going to ask and answer, so I appreciate the time. Thank you. It's the health clubs. And

we have no further

questions. Okay. Well, I thank everyone for your time this morning. We really appreciate your interest, and we look forward to speaking with you again.