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. [Operator Instructions] 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 Tani Girton, 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 Tani, along with Chief Credit Officer, Beth Reizman, 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-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 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 and a team ready to fire on all cylinders, we believe we entered 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% and a return on equity of 8.6%.

Diluted earnings per share were $2.22. Loans increased $245 million in 2020 or 13% 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.

Non-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 $0.23 per share on January 22, 2021. This represents the 63rd consecutive quarterly dividend paid by Bank of Marin 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 Marin 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 our 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 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 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 to business as usual to new realities, while we continue 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 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 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 9 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 3 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 are 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 a 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. [Operator Instructions].

[Operator Instructions] Our first question comes from the line of David Feaster with Raymond James. Please go ahead..

Good morning everybody..

Good morning, David..

Good 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, kind of what’s your timeframe? When do you think you are going to see originations kind of normalize and where are you expecting to see the most growth?.

Well, David, there is – I think we are positioned well because we have two new commercial banking offices, one in – it’s not brand new, it’s about a year – a little over 1.5 years old over in Walnut Creek and we have a brand new one in San Mateo.

So those are going to generate opportunities just because it’s new markets for us, so there is going to be opportunities. And our – in Santa Rosa, we have a manager there who has got a very strong focus on the wine business.

And historically, we’ve done a lot of business in Napa, but we’re also now moving and shifting a lot of our focus to the Sonoma, Sonoma County wine business. So I am thinking we are 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 am really encouraged by good results we have had out of Oakland and also in Nevada, in our commercial banking offices in Nevada.

And I’m very confident that as we come out of this, we can actually go out and see our clients and see our prospective clients. We are going to do really well because we are 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, so I am 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 and I mean obviously payoffs and pay-downs has 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’ve – you are kind of used to, is that a back half of the year kind of story or what do you think is that?.

Sure. Let me – I will comment and I’d like Tim Myers to jump in after I finish to talk about the – on commercial banking. 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 and who knows what normal is going forward, but I think that’s the timeframe.

As far as the competitive environment, margin compression is very real. And we continue to see banks are making offers a very, very low rate 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 maybe Tim can add to that..

Yes. 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 lender.

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 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 that were third-party refinancing, a significant chunk of that was non-bank lenders, interest-only, non-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.

But we are looking in every market, back to your question, of how to do this and generate growth in the – with the – in the absence of being able to go out and see everyone like we normally – like the 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. 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 has always done.

So we also have made some key hires in some of these markets. Russ mentioned that new manager, we have a new manager in Oakland and some other key positions we 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 are starting to hit their stride before the PPP – the pandemic and the PPP process started. So I think if you put all those things together, we’re positioned. I don’t know when that magical data is though that all clicks..

Yes, that’s understandable. And then – and that’s helpful color. Thank you. And then just shifting gears, I just wanted to get your thoughts on asset quality. Obviously, you have always been a tremendous underwriter and maintain a really conservative credit culture.

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 loan loss reserve ratio under CECL? Is this kind of 110 to 120 basis points about the right level going forward?.

I am going to make a couple of comments and I am also going to ask Beth Reizman, who is 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 are not operating right now. In the Bay Area, California in general, has been shutdown.

And so the good news is we have real estate on the two health clubs we have and the loan to value ratios are very low. Hospitality in general is tough right now. It’s tough. People – there was a time where we were – the hotels were back open and they were operating again and the health clubs were doing things outside.

It’s – but it’s – so we have kind of gone 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 am very confident that we will even these challenged credit because of the industry and because of the COVID shutdown, we will respond appropriately.

And maybe Beth can chime in on that..

Sure. This is Beth Reizman. I am 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 are watching that we kind of identified if the surge was to – if there was to be a second surge or the pandemic was prolonged, but these are the ones who might have more difficulties 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 have 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 non-accrual..

Okay. That’s helpful. Thanks everybody..

Thank you..

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

Thanks. Good morning..

Good morning, Jeff..

Good morning, Jeff..

Taking a look at the margin, it looks like the incremental I guess negative impact on margin through PPP of an increase of 9 basis points to the negative get your core or I guess the reported margin down 4 suggesting some core strength there, interested in your views going ahead if we include the sub-debt redemption and possible impact? And big picture, just what you are seeing on the margin, I think, Russ, you alluded to this is obviously a thought or a factor in when you are 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 ex-PPP, that would be great?.

Alright. Sure. I will let Tani talk a bit about the margin. It’s challenging. At this point in time, you have got an interest rate environment that’s going to be where it is for a long time we know and so we have historical loans as they get paid off. If they are replaced by new loans, we are probably going to get margin compression out of that.

So obviously, you want to do everything you can to maintain your portfolio, avoid payoffs and be a relationship bank. I think the important part of that is being out, seeing your clients and being in front of them. Relationship banking is the key to maintaining margin.

And if we’re – 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 are taking care of our clients’ needs, making – understanding their financing requirements and so that we can address them appropriately as we go forward.

And that’s – we try to do that by phone, by doing many things of that nature, but there’s nothing better than actually going down – going out and sitting down with our clients and understanding what’s going on in their business.

So that’s something that’s taken a bit of a hit, I suppose, for every bank, but certainly for us because that’s how we focus on our energies and managing our relationships. So I’m, again, confident as we come out of this that that will improve. But Tani, you can comment a bit on the couple of margin numbers..

Okay. Good morning, Jeff..

Good morning..

I think 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.

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.

Security is 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 absorb there.

But then going forward, as Russ said, we are 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, wanted to circle back your kind of wrap up comments on the M&A side kind of you are 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 are active in buyback doesn’t necessarily mean you are out of the M&A market or you probably wean off that if some opportunities come about.

Just kind of weaving those two together would be helpful?.

Yes. I mean it’s – we continue the buyback program, that’s been the plan. And we think there have been opportunities for us to buy stock back, which is – because we still feel like buying our stock is a great value. At the same time, if there was an opportunity for M&A, and obviously, we would likely put that – the buyback on hold if that happens.

I really think, as I talk to the investment banking community and other banks around the state, this is – 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 is lots of conversations going on out there.

I don’t know where they are, but we will – things will start to present themselves, I am sure, in the future. So I’m confident with our – our stock price has held up quite nicely, and the bank’s credit quality position is – and deposit franchise are so strong that we are a very attractive acquirer to banks that might want to partner up.

And so I am – we are certainly out there talking to everybody and see what it presents itself in the future, but I am confident 2021 will be a big year for M&A and certainly in California..

Great. Thanks, Russ and Tani..

Sure..

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

Hey, good morning, Tim. Thanks for taking the questions. Just want to get back to the reserve related question that 1.27% ex-PPP and acquired.

How should we think about that ratio in a post-CECL world and where it might bottom? And as it relates to that, maybe a good way of looking at it would be just the kind of weighted average rate that you are setting aside on new production of late?.

Matthew, I am going to ask Beth Reizman and Tani to answer that one, so Beth and her staff, I suppose..

Actually, Tani, why don’t you start and then I will fill in, it’s a little bit more of an accounting question..

Okay. It sounds good. So, Matthew, good morning. The $127 million as of December 31, even though because it excludes acquired and SBA PPP loans because we are in CECL right now, acquired loans are actually under CECL, 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 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 despite what the forecast, how they might change or how the model might respond just while we get used to the model..

Yes I’ll add on that. This CECL – the difference of CECL 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 net interest income?.

Yes, Tani, can you answer that one?.

Yes, let me pull that number.

And you want for the quarter or for the year, the total PPP income?.

No, remaining. I just want to make sure our numbers are in the ballpark for what’s left that you can – that you’ll realize in revenue, not just around on the PPP..

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. Yes, let me pull that number. I’ll come back to you in just one sec..

Okay. No worries. And then – I was going to ask another – an expense-related question, and I know, Tani, you’re looking for that number.

Maybe just on the M&A front, Russ, can you just remind us what the types of potential targets you would like to consider and your pricing criteria?.

Well, historically, we focus on the Bay Area. That’s not to say that, that would always be the case. In the Bay Area, there’s really – while there are still many banks in the market, the number has certainly shrunk over the years. And when we – we’re pretty disciplined about the way we operate.

And there’s a number of metrics, obviously, that are so important to earn back how many years and keeping it under 4 years certainly and having it be accretive in the first full year. That’s very important to us. And being in a market that we think that they have either as in the markets we operate, contiguous to or that we view as good growth market.

And we’ve been clear about looking at – looking as possibility of going south and also potentially going east. It’s just we have as a community bank, it’s really important, I think, as we look forward, that with 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 interest rate environment over the next few years for sure.

And so if you can’t – if you’re getting relatively low margin on the portfolio, then you have to be very cognizant of your 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 look forward in the future, that’s going to be – it’s going to be important to spread that over a larger base. And so that’s why I think M&A is going to be – there’s going to be a lot of activity, and we certainly are interested in participating in that..

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

I don’t know about the release of the unfunded commitments. 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 lines. So, they can 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 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 we said, a lot of noise in the first quarter.

The 401(k) contributions due to the year end resets and also the bonus payments, that tends to be a pretty significant item. Additionally, we calculate our bonuses for 2020 in the first quarter, and that’s a number that is – has yet to be determined, and we have accrued bonuses at a fairly high level.

So we typically have some true-up in the fourth – in the first quarter around that as well. So, I’d say expenses in the first quarter yes, you’re going to have a lot of noise in a lot of different directions and some pretty big-ticket items. So, I think you’re right about that.

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 a normal fashion, we’re going to have more expenses that we weren’t able to execute on in 2020 associated with that.

And additionally, we have, frankly, 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 Bohlen with KBW. Please go ahead..

Hi, good morning everyone. .

Good morning, Jackie..

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 million, I wanted to just 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 $22.874 million 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 are going to have this year, under the assumption, which I think is fairly consensus that we’re going to be and what of our new normal environment looks like in the latter half of ‘21 and your bankers can meet with their customers face-to-face, you’ve got loan growth kind of moving forward, how are you thinking about balance sheet fluctuations through the year, also taking – you’re obviously very active in managing your deposit book and liquidity flow.

So just wondering how you are 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 those loan totals and things of that nature?.

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

Okay. Well, deposits have grown substantially over this past year. And I believe as we get back into a more normal time, that’s going to change, and then you’ll start seeing businesses start to reinvest in lending opportunities.

So, if I had to make a prediction, I would suggest that loan growth will occur more in the latter half of the year, deposit 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 kind of opening up that haven’t been operating.

So, it’s going to be – it’s been – last year was a very strange year, and this year will be maybe not equally strange.

But it will be the first half, a lot of our customers are still struggling with, particularly those in hospitality, as we talked about, are struggling, but we hope that we can get through this period and get to the time when we start to open up. And then you’ll start seeing reinvestment, you’ll see the lending opportunities.

And it will also – we will start to see how commercial real estate will react because I think the big question now is there is 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 real estate? And I think that that’s – I think it’s probably a hybrid. I – from people that I talk to, most people are anxious to get back to the office.

So I think you’ll see that, but I think there’ll be an equilibrium that will reach later in the year where the businesses that will have – businesses will have a 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 of 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, which you just lose something when we were not.

And so I think a lot of businesses will be that way, so you’re going to see the first half of the year kind of a continuation of what we’re going on. And then the second half, I suspect, we’ll see a slow return to a more normal. That’s kind of my thoughts..

Okay. Thank you. That’s great color. And....

Jackie, you have – sorry, it’s Tani. Going back to your provision on off-balance sheet, the $1.1 million 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 million..

$2.779 million. Great. Thank you..

You are welcome..

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

Well, I think what you saw in the – when PPP first came out was that there was a tremendous inflow of deposits. So all these – the PPP loans are made, they go into those accounts. And we assume 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 that businesses are and – 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. While we have had – and Tim, so maybe I can have you jump in and talk a little bit about PPP and things when I finish..

Sure..

We haven’t had the numbers of the applications for the dollars. So maybe, Tim, you could add to that on the PPP side..

Yes, 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 credits was down significantly, 5 points from 38 to 33, not average, but year-over-year. And we continue to see, we sat – saw some PPP proceeds pay down loans.

Just like Russ said, they increased deposits and cash is fungible, and that gets really hard to pull apart, but $11 million of our payoffs last year, which is borrowers applying cash.

So right now, that’s a very conservative mindset that, to your question before, as we – and as Russ talked about we see that borrower mindset change and the economy – 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 – our average loan on the first round is about just north of $170,000. This one would be about $130,000. They’re still coming in.

But I think overall, we are 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 process.

While the government’s rolled out the form for that, they’re not able to accept that, but we expect that to both speed up the forgiveness process from the round one borrowers, because 70% something of our borrowers were under that amount the first time and it will be a higher percentage this time, probably closer to 80%..

Okay, great. That’s good color. Very helpful. Thank you, everyone. I appreciate it..

You are welcome..

And our last question in queue is coming from the line of Tim Coffey with Janney. Please go ahead..

Hi, thanks. I just had a quick follow-up on the health club loan and the two hotels.

Do these – do you see these loans having a pathway to curing themselves and 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. She has been very involved with this. It’s clear that nobody’s – I mean they are shutdown. So do I see it as a chance for them to recover? Yes. I mean as soon as we get back to where we – where people can go to gym, then I think these credits will have an opportunity to right themselves so to speak.

It’s just – it’s the lack of business. I know that there is some outdoor activities that they have, and they have done that, but it’s still pretty tough. So the other question – the other thing I’ve seen, we’ve seen lots of discussion in the news. And health clubs have suffered 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 – again, we have very strong collateral base, but I’m confident we can work through these.

And maybe, Beth, you can add some color to that, too?.

Sure. All of these credits were doing – were struggling, but they were doing better once they were able to reopen after the first shelter-in-place. That – but again, that’s why you saw our classified and non-accrual increased in the fourth quarter.

It was this second event that really made it difficult for ones where the guarantors were helping, etcetera, 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 of the homeless during the pandemic, and now they’re reverting back but that – it will take time, and they do need the economy to reopen, same thing with the health clubs..

Okay. Alright. Well, most of my questions have been asked and answered. So, I appreciate the time. Thank you..

Thanks, Tim..

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 at the end of next quarter. Thank you very much..