Bank of Marin Bancorp

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 1 followed by 4 on your telephone. If at any time during the conference call you need to reach an operator, please press star zero. 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 Gerton, Executive Vice President and Chief Financial Officer. Our earnings press release, which we issued this morning, can be found on our website at bankofmorin.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 Tani, 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. Good morning. and welcome to the call. Bank of Lynn generated strong results for the full year despite the pandemic-related 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 was solid as we moved 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 and 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. Net income for the full year was $30.2 million. which represented a return on assets of 1.04 percent and a return on equity of 8.6 percent. Diluted earnings per share were $2.22. Loans increased $245 million in 2020, or 13 percent, to $2.1 billion at 12-31-2020, up from $1.8 billion at December 31, 2019. Deposits grew $168 million, or 7%, to $2.5 billion at 12-31-2020, compared to $2.3 billion at 12-31-2019. Land interest-bearing 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. Non-accrual loans represented only 0.44% of the bank's loan portfolio as of 12-31-2020. 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 Maryland 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 Marin 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 a 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 1 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 in 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 would benefit 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 stocks. 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 related 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 1.09%, and return on equity was 8.98% compared to 0.98% and 8.37% 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 increase 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 30th. 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, 4.85% trust preferred debt in the first quarter of 2021. The redemption will consist of a 4.1 million principal payment, quarterly interest due, and $1.3 million in accelerated accretion of purchase discounts. 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, Tani. 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 branches 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 are 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 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.

Thank you. If you would like to register a question, please press the 1 followed by the 4 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 1 followed by the 3. 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 1 followed by the 4. Our first question comes from the line of David Easter with Raymond James. Please go ahead. Hey, good morning, everybody.

Hello, David. You guys talked about being positioned for growth, which is extremely encouraging. I'm just curious, how do you think about this and your ability to grow going forward? What's your time frame? When do you think you're going to see origination kind of normalized, and where are you expecting to see the most growth? Well, David, I think we are positioned well because we have two new commercial banking offices, one in, it's not Burma, it's about a year and a half old, over in Dollar Creek, and we have a brand new one in San Mateo. So those are going to generate opportunity just because there's new markets there, so there's going to be opportunity. And, you know, our... 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 shifting a lot of our focus to the Sonoma County wine business. So I'm thinking we're going to see a lot of activity out of those. The other issue is that during the pandemic, it's really a tough time for growth, as we all can attest to. So I think as we come out of this, our offices are all in terrific shape, credit-wise, credit quality-wise, and our lenders are kind of ready to go. I'm really encouraged by... good results we've had out of Oakland and also in Novato and I'm very confident that as we come out of this and we can actually go out and see our clients and see our prospective clients, we're going to do really well because we're a relationship bank and it's really important to be in front and center with the customers and This last year now almost has not allowed us to do that very much. I'm confident and encouraged as we go into this new year. Okay, that's helpful. And kind of maybe just following up on that, could you maybe just talk about the competitive landscape? I mean, obviously payoffs and paydowns 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 the growth and kind of get back towards the mid-single-digit growth that we're kind of used to? Is that a back-after-the-year kind of story or anything? Sure. Sure. I'll comment. I'd like Tim Myers to jump in after I finish to talk about the collection of items. 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 normal. I think we know what normal is going forward. I think That's the time frame. As far as the competitive environment, you know, margin compression is very real. And we continue to see banks out making offers of very, very low rates for a pretty long term. And so that's the challenge, to maintain margins. and get the volume also, and that's the balance of what we have to do as an organization. And then Tim can 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... You know, we're a relationship commercial bank. We're not a transactional lender. So, as Russ said, it really requires us to be out in our markets, you know, 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, you know, sub-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 refinances, a significant chunk of that was non-bank lenders. you know, interest-only, non-recourse-type financing. So we continue to be selective in the kind of deals we'll do. You know, 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. But we are looking in every market, back to your question of how to do this and generate growth, in the absence of being able to go out and see everyone like we normally like through virtual events. We're keeping marketing very busy and trying to plan lots of mixers and client or prospect events. And that includes, Russ talked about the wine industry focus. You know, 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 and be able to do what it is the bank's always done. So we also have made some key hires in some of these markets, best mentioned our new manager. We have a 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 are fully staffed, 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're positioned. I don't know when that magical date is, though, that all clicks. Yeah.

That's understandable. And that's helpful, Connor. Thank you. And then just shifting gears, I just wanted to get your thoughts on the athlete quality. Obviously, you've always been a tremendous underwriter and maintain a really conservative credit culture. I just wanted to get some thoughts on the migration trends, especially within the health club and the hotels. Was this kind of a cleanup quarter, or do you think there could be some additional migration? And then just... How do you think about the low-mods reserve ratio under CECL? 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 Beth Riser, who's our chief credit officer, to jump in with comments about CECL and credit quality. We have a couple of health clubs who... Clearly, if you have health clubs, they're not operating right now. In the Bay Area, California in general has been shut down. And so the good news is we have real estate on, you know, the two health clubs we have, and the land evaluations are very low. You know, hospitality in general is tough right now. It's tough. You know, there was a time where we, you know, the hotels were back open and they were operating again and health clubs were doing things outside. But we kind of got into another shutdown in California, so it's been more difficult. But long-term, again, once we get to where we are, operating at a more normal time, I'm very confident that we will, and even these challenge credits, because of the industry and because of the COVID shutdown, we'll respond appropriately. And maybe Beth can chime in on that.

Sure, this is Beth Reisman. 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 there was to be a second surge or the pandemic was prolonged, that these are the ones who might have more difficulty just based on the nature of their industry, hotel, recreation, you know, 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, you know, one on none accrual. Okay. That's helpful. Thanks, everybody.

Thank you.

My next question comes from the line of Jeff Lewis with D.A. Davidson. Please go ahead.

Thanks. Good morning. Hello, Jeff. Hello, Jeff. Take a look at the margin. It looks like the incremental, I guess, negative impact on margin through PPP is an increase of nine basis points to the negative margin. get your core, or I guess the reported margin down for suggesting some core strength there. Interested in your views going ahead, if we include the sub-debt redemption and possible impact. And, you know, big picture, just what you're seeing on the margin, I think, Russ, you alluded to this, is obviously a thought or a factor when you're booking new growth or the competitive landscape. But it seems like the margin is firming up and maybe some more help to come. And maybe if we color those comments XPPP, that would be great.

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

Okay. Good morning, Jeff. I think, you know, you hit the nail on the head with the PPP fee statement. 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. So 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 CMBS portfolio, securities fairly early on and built up a pretty significant position in that. And so that does help in times like this. But that did make a difference this quarter in particular. The trust preferred redemption, as you said, it will be a drag for sure in the first quarter because we've got a lot of accelerated discount accretion to observed there, but then going forward, as Russ said, we're doing everything we can going forward to help the margin, and that should be a contributor in that regard.

Okay. Thank you. And just my other question, Russ, I wanted to circle back your kind of wrap-up comments on the M&A side. You know, 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 the buyback program, that's... That's been the plan, and we think, you know, there are good opportunities for us to buy stock back, which is because we still feel like buying stock is of great value. At the same time, if there was an opportunity for M&A, then obviously we would likely put the buyback on hold if that happened. I really think if I talk to... the investment banking community and the other banks around the state, I heard 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, you know, I'm confident with that. Stock prices have held up quite nicely. And, you know, the bank's credit quality and position in a deposit franchise are so strong that we're a very attractive acquirer to banks that might want to partner up. And so I am, you know, we're certainly out there talking to everybody and, you know, see what presents itself in the future. And I'm confident in 2020. 2021 will be a big year for M&A and certainly in California. Great. Thanks, Russ and Connie.

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

Please go ahead. Hey, good morning, and thanks for taking the questions. I just want to get back to the reserve-related question that one 0.27% X PPP and acquired. How should we think about that ratio in a post-diesel world and where it might bottom? And as it relates to that, you know, maybe a good way of looking at it would be just the kind of weighted average rate that you're setting aside on new production of late.

Matt, can I ask Beth Risen and Connie to answer that one for Beth, please?

Actually, Connie, why don't you start, and then I'll fill in a little bit more of an accounting question. Okay, sounds good.

So, Matthew, good morning. The 127, as of December 31st, even though it says it excludes acquired and SBATPP loans, because we're in CECL right now, acquired loans are actually... part and parcel of that ratio. So it's really just the difference between the 1.10 and the 127 is really simply the PPP loan. I'd say that, you know, we have qualitative factors, if you will, or qualitative considerations that 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 despite, you know, what the forecast, how they might change, or how the model might respond, just so we get used to the model.

Well, I'll add on that. The difference with CISO is there is a significant forecasting component. forecast and prove 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, Tanya, can you answer that one?

Yeah, let me pull that number. You want for the quarter or for the year the total PPP?

No, remaining. I 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 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 you in just one sec.

Okay, no worries. And then, oh, geez, I was going to ask another expense-related question, and I know, Tanya, you're looking for that number. Maybe just on the M&A fund, Russ, can you just remind us, you know, what the types of potential targets you would like to consider and, you know, your pricing criteria? Sure.

Well, you know, historically, we focus on the Bay Area. Best not to say that that would always be the case. In the Bay Area, there's really, while there are still many bikes in the market, you know, the number has certainly shrunk over the years. And, you know, when we... we're pretty disciplined about the way we operate. And, you know, there's a number of metrics, obviously, that are so important, you know, earn back how many years and keeping it under four years, certainly. And, you know, having it be accreted in the first third year, that's very important to us. And being a market that we think that has either a, What are the markets we operate continuous to or that we view as, you know, good growth markets? And, you know, we've been thinking about looking at possibility of going south and also potentially going east. It's just we have as a theory, but it's really important, I think, as we look forward that... this margin compression the way it is, size definitely matters. And being bigger and being able to spread your expense base over a 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 interstate environment over the next few years for sure. And so if you can't, if you're getting relatively low margins on the on the controlling end, you know, then we have to be very cognizant of the expenses. And so we've been, we as an organization have always been very, very careful about expense control and doing what's right to maintain our expenses. But, you know, when you look forward in the future, that's going to be, you know, it's going to be important to spread that over and around today. And so that's why I think M&A is going to be, certainly there's going to be a lot of activity And, you know, we certainly are interested in participating in that.

Great. And then maybe just on the expense outlook, Tonya, 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 looms relatively flat with that seasonal increase, kind of offset by maybe some relief in reserving for unfunded commitments and then we drift lower from here throughout the year?

You know, I don't know about the relief for the unfunded commitments statement, I mean, you can always see some shifts between unfunded commitments provisioning in the non-interest expense line and then the provisioning for allowances on credit losses in the other line. So they 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 Beth was talking about where the overall provision is going, I think she had both of those in mind. We typically have, as he 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 a number that is, you know, has yet to be determined, and we have accrued bonuses that are fairly 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 noise in a lot of different directions and some pretty big ticket items. 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 and 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... some things that got moved from 2020 into 2021 because 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 is 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 wanted to start off with a quick housekeeping question before I get into some more theoretical items. Just given the adoption of CECL, the $22,874,000, I wanted to verify that that's associated with loans only or if it also includes the allowance on unfunded commitments and it's the total ACL.

The 22874 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 terminologies. I don't like to automatically assume. Thank you. And then just next, this one might be for you, Russ. Just thinking broadly about the pushes and pulls that you're 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 21, and your bankers can meet with their customers to You've got loan growth kind of moving forward. How are you thinking about balance sheet fluctuation through the year? Also taking, you know, you're obviously very active in managing your deposit book and liquidity flow. So just wondering how you're thinking about that heading into the year and through it.

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

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

Oh, okay. The deposits have been growing substantially over this past year. I believe if we get back into a more normal time that that's going to change. If I had to make a prediction, I would suggest that loan growth will occur more than half of the year. It will continue to grow or maybe go flat. Maybe continue to grow slightly through this year. then it may flip-flop because I think that you will see more reinvestment. You will see more businesses kind of 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, you know, the first half. A lot of our customers are still struggling with particular things in hospitality, as we talked about, are struggling, but we hope that we can get through this period and get to a time when we start to open up, and then we'll start seeing re-engagement, we'll see the lending opportunities. And it'll also start to see how commercial real estate will react. Because I think the big question now is there's a lot of people working from home, and will they all come back to the office? Will there be a lot more people working from home, and so less need for commercial offices. And I think that that's, I think it's probably a hybrid. From people that I've 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 we'll reach later in the year where businesses that, you know, will have, businesses will have a portion of their time portion of their employee base working remotely, because we're seeing it does work, but the risk, like if you look at it from our perspective at the bank, the biggest risk of everybody being remote is the culture, and I think our 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. We should just use something in the remote. And so I think a lot of businesses will do that way. So you're going to see the first half of the year kind of a continuation of what we were on, and then the second half I suspect you'll see a slow return to a more normal. That's kind of my thought.

Thank you. That's a great caller.

And I see you have a new phone. Sorry, it's funny. Going back to your provision on off-balance sheet, the 1.1 was the provision for this quarter, but I wanted to give you the total balance of the off-balance sheet reserve, and that's $2,779,000. $2,779,000.

Great. Thank you. Mm-hmm. 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 seasonal trends in deposits versus, you know, adding additional PPP loans in the quarter and how that might impact the overall portfolio of deposits, not loans.

Well, I think what you saw in the PPP first amount is that there is a tremendous inflow of deposits. So all the PPP loans are made, they go in 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 primarily are accumulating deposits, accumulating cash, and we've seen that throughout the year. I think this 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. Well, we have had, and Tim, maybe I can have you jump in and talk a little bit about PPP as soon as I finish. Sure. We haven't had the numbers of applications or the dollars, but maybe, Tim, we could add to that on the PPP side.

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, 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 borrowers applying cash. So right now that's a very conservative mindset that, to your question before, as we, and as Russ talked about, as we see that borrower mindset change and the economic momentum pick 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 total. So that's, you know, our average alone on the first round was about $170,000. This one would be about $130,000. 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 around one borrower, 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 Costa. Kathy with Johnny. Please go ahead.

Great. Thanks. I just had a quick follow-up on the health club loan and the two hotels. Do these loans have any 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 and I'll have Beth answer that. 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 can go to gyms, then, you know, I think these critics will have an opportunity to write themselves, so to 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, the other thing that I've seen, you know, we've seen lots of discussion in the news, and, you know, health clubs are suffering 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 a pathway out. We have a deal. We have a very strong flyer base, but I'm confident we can work through this. And maybe, Beth, you can add to 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 fourth 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, you know, 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. All right.

Well, the rest of my questions are the national answers, but I appreciate your time. Thank you.

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.