Q4 2020 Bank of Marin Bancorp Earnings Call

Per day.

[music].

Good morning, and thank you for joining bank of Marin Bancorp earnings call for the fourth quarter and year ended December 31 2020.

I am of Dray of 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 for 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.

Our Russ Colombo, President and CEO, Tim Meyers 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 bank of Marin Dot 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 20, <unk> 'twenty 'twenty, one 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 rich.

<unk> 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.

And welcome to the call.

Thank you 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 low relief.

Payment relief to borrowers who needed breathing room to assess the pandemic fallout.

We also actively participating in the small business administration Paycheck protection program.

Hoping of almost 2000 local businesses secure PPP funding.

Providing them with guidance indexes to apply for forgiveness.

Our credit quality held firm throughout the year and of.

As solid as we move into 2021.

We continue to work with clients affected by what we hope for the later 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 at 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.

Start with of highlights.

Net income of for the full year was $30 $2 million, which represented a return on assets of one point of 4% and our return on equity of eight 6%.

Diluted earnings per share were $2.22.

Loans increased $245 million in 2020 or 13%.

For $2 1 billion of 12, 31, 2020 up from $1 8 billion.

Number 31 2019.

Deposits grew $168 million or 7%.

For $2 5 billion at 12 31 2020.

Compared to $2 3 billion.

At 12 31 2019.

Noninterest 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 four 4% of the bank loan portfolio as of 12 31 two.

2020.

Given the bank capital position and solid 2020 results our board of directors declared a cash dividend of <unk> 23 per share on January 22021.

This represents the 60 <unk> third 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 203709 shares totaling $7.2 million.

In December we announced the retirement of Jim Burke Executive Vice President and Chief Information Officer, and then rich Lewis to succeed him rich.

Rich and 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. We 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, 2000, 2014 borrowing relationships with 29 loans totaling $71 million had requested additional payment relief.

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 of our largely loans on office buildings with COVID-19 impact of tenants hotels, and hospitality and commercial properties with retail tenants.

During 2020 as Russ noted the bank successfully helped almost 2000 companies obtained funding through the SBA Paycheck protection program.

All are now able to apply for forgiveness for 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 of loan requests from around 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 then 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 customer.

Who would benefit from participating in the program this time around.

We remain optimistic about new growth opportunities on 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 the 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.

Yeah.

During a very challenging year, we remained true to our disciplined fundamentals.

In addition to our solid credit quality and robust capital position on.

Low cost deposit base provides strong liquidity and our diligent expense management supports ongoing profitability.

As Russ said, we produced net income of $32 million in 2020.

Net interest income of $96 7 million grew 1 million over 2019, primarily due to growth in P. P P and commercial real estate loans as well as lower funding costs.

Non interest income of $8 6 million fell 534000 from 2019.

Primarily due to reductions in overdraft and a T M fees bank owned life insurance income.

Fees on deposits 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 800000 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.

Well salaries and benefits overall were relatively unchanged year over year.

Annual Merit and related cost increases were mostly offset by S. P. A P. P P 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 seven 5 million in the third quarter and $9 1 million in the fourth quarter of 2019.

Diluted earnings per share were <unk> 60 cents in the fourth quarter of 2020 compared to 55 cents in the prior quarter and 66 cents for same quarter a year ago.

For the quarter ended December 31, 2020 return on assets was 1.19% and return on equity was $8 nine 8%.

Compared to <unk> nine eight per cent and $8 three 7% 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 P. P. P 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 seasonal.

Earlier this year, we postpone the adoption of Cecil 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 $610000 provision for losses on unfunded loan commitments.

As of December 31, 2020, we adopted the Cecil standard increasing the allowance for credit losses by 748000, and the allowance for unfunded loan commitments by $1 1 million.

These amounts represent the difference between allowances calculated under the seesaw method as of December 31 of 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 of cumulative transition adjustment to retained earnings representing the difference between reserves calculated under Cecil and incurred loss as of December 31, 2019.

Cumulative transition adjustments of $1 6 million for credit losses, and 122000 for losses on unfunded commitments were recorded in retained earnings and totaled 1.2 million net of taxes.

Yeah.

Second the 856000 provision reversal of 960000 provision for unfunded commitments bring the ACL and allowance for losses on unfunded commitments to their December 31.

'twenty 'twenty Cecil 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 for eight 5% Trust preferred debt in the first quarter of 2021.

The redemption will consist of a $4 1 million principal payment of quarterly interest due on one 3 million in accelerated accretion of purchase discount.

In closing bank of Marin continues to build new capabilities and delivered solid performance during a year of many changes we.

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 rest of would like to share some final comments.

Thank you Tani.

2020 brought its 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 are 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.

First rate customer service.

And of 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 bank 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.

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 earnings call for the fourth quarter and year ended December 31, 2020, I am Andrea Henderson director of marketing for bank of Marin during.

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.

Conference call you need to reach an operator, please press star zero debt.

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Questions can also be submitted via the webcast page by clicking the ask a question tab and typing your question into the box that appears below the top.

Again to register for a question over the phone lines. Please press. The one followed by the for our first question comes from the line of David Feaster with Raymond James. Please go ahead.

Hi, good morning, everybody.

Good morning, David Good morning, Oh, you guys talked about being positioned for growth, which is extremely encouraging.

Curious how do you think about the and your ability.

To grow going forward and kind of whats your timeframe. When do you think you may see origination volume normalize in and where are you expecting to see the most growth.

Well, David I think we are positioned well because we have we have two.

Two new commercial banking offices, one in non.

It's not brand new as part of your little over a year.

On an apples over and.

While the Creek and we have for brand new ones on sand.

For two so those are going on those are going to generate opportunity just because of new market for us. So there's gonna be they've gotta be opportunity.

And.

Our.

Yeah from Santa Rosa.

Have.

For manager there Who's got a very strong focus on the volume business.

We've got a lot of business in Napa, but we're also.

Now moving shifting a lot of our focus for the Sonoma Sonoma County wine wine business.

I'm thinking we're going to see a lot of activity out of those.

The other the other issue is that during the pandemic, it's really really of tough time for for growth as we all of we often.

Test too so I think as we come out of this.

On our offices are all in.

Perfect shape credit wise.

Credit quality wise.

And our our lenders are.

Kind of ready to go on.

I'm really encouraged by good results, we've had out of Oakland.

And I'm also in Novato.

They get off Susan Nevado and Im very close on it that as we come out of this and we could actually go out and see a quiet.

For a perspective quite we're going on we're gonna do really well because we're a relationship bank of what's really important to be front and center with the with the customers and.

You know this last year now almost as.

There's not allowed us to do that very much so on.

I'm kind of I'm confident and encouraged as we go into the winter.

Yeah.

Okay. That's helpful and kind of maybe just following up on that could you maybe just talk about the competitive landscape.

Yeah, I mean, obviously payoffs and pay downs.

Real challenge.

Just any comments on the competitive landscape and then maybe when you think you can return for that kind.

The growth and kind of get back towards the mid single digit growth that we you know you.

Kind of used to is that of back half of the year kind of sort of your.

What do you think for sure.

Sure, Let me I'll comment on like the 10 buyers all of them to.

Adjusted after I said, if you could talk about the commercial bank.

Probably later in the year whether that.

Late spring early summer I think that's when we really are able to.

We get back to a more normal I mean, who knows what normal is going forward, but hum.

You know I think I think.

That's the that's the timeframe as far as the competitive environment.

Margin compression is very real.

We continue to see.

Thanks, a lot of making offers a very very low rate for pretty long term.

So that's the challenge to maintain margin.

And get the volume also.

That's the balance of of what we have to do as an organization.

Maybe timken can add to that.

Yeah. Thank you Ross good morning, Russ really ahead of everything I wish I knew the magical answer to your question about when exactly but you know we're relationship commercial bank were not of transactional lender. So as Russ said it really requires us to be out on our markets you know talking people on to giving us not feed of bank of their business.

Bank of them personally.

Business from other banks in terms of of competitive landscape.

We are seeing a lot of very aggressive banks, we are seeing competitors on the market come in.

Sub 3% financing on real estate chasing deals out of their market.

If you look at the pay offs, we had during the year in 2020 of that were third party of refinancing of a significant chunk of that with non bank lenders interest only non recourse debt financing. So we continue to be selective in the kind of deals will do.

That has really put us on 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 absence of being able to go out and see everyone. Like we normally like for virtual events, we're keeping marketing very busy.

Kind of plan lots of mixers and client or prospect of events and that includes Russ talked about the wine industry focus that group also focuses on the central coast and for 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 on.

They'll be able to do what it is the bank has always done. So we also have made some key hires and some of these markets Russ mentioned that new manager we are of a new manager in Oakland and.

Some of their key positions, we filled we of 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 were starting to hit their stride before the P. P. P.

The pandemic on the PPV process started so I think of you put all of those things together, we're position I don't know when that magical date, as though that that all correct.

Yeah, 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 the asset quality, obviously, you've always been a tremendous underwriter and maintain a really conservative credit culture. You just wanted to get some thoughts on on the migration trends, especially within the health club of the hotels.

Was this kind of of 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 Cecil is this kind of 100 of 10 to 120 basis points about the rate level going forward.

I've met of I'm going to make a couple of comments and I'm also going to ask Beth rise of he's our chief credit officers of the jump in with the comments about.

And.

Credit quality we've.

We've had we have a couple of of health clubs, who.

Clearly if you have health clubs, they're not operating right now.

On the Bay area of <unk>.

California in general has been shut down.

So.

The good news is we have real estate on debt.

To help because we have it.

And Linda Linda.

One of value ratios of very low.

Hospitality in general it's tough right now it's true.

For people there was a true.

We.

The hotels are back open and they were operating again in health clubs were doing things outside it for it 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.

We're operating at a more normal time, I'm very confident that we will even even these challenges.

Of these credit because of the industry because of the.

On the Covid shutdowns will will respond appropriately and maybe maybe a basket of can chime in on that.

Sure. This is Beth ryzen and I'm, the Chief Credit Officer.

And as Russ said this is certain industries, where I wouldn't call. It of clean up at all of these were credits that we are watching that we kind of identified if the third let's say if there was to be of second third or the pandemic with prolonged but these are the ones who might have more difficulty just based on the nature of their industry Hotel right.

Creation, the hospitality industry.

That said at this point.

Based on our payment relief program, just our normal.

Portfolio of monitoring I think we've identified any significant credit that we expect to have issues that can always be some small ones, but again. These were ones that we were watching so with not a surprise when we on classified them or put you know went on non accrual.

Okay. That's helpful. Thanks, everybody.

Thank you.

Okay.

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

Good morning.

Good morning, Jeff.

I'll take it on.

And at the margin.

It looks like the incremental I guess negative impact on margin through P. P. P of.

That's an increase of nine basis points of negative.

Of course, or I guess, the reported margin down for suggesting some some core strength they're interested in your views.

Going ahead, if we include the <unk>.

Sub debt redemption.

And possible impact.

And Big picture, just what Youre seeing on the margin.

Bank Rusty alluded to this as of obviously.

Father of factor in when you're booking new growth or the competitive landscape, but it.

It seems like the margin firming up and maybe some more help to come in and maybe if we can.

Color of those comments ex PPP that'd be great.

Sure I don't know that I'll, let Bonnie talk a bit of about the margin of it it's.

All of it at this point in time, you've got.

On the interest rate environment, that's going to be.

It is for a long time.

Yeah, we know until you have historical loans as they get paid off.

For them, if they're replaced by new loans are probably going to get larger.

Margin compression out of that so obviously you want to do every day and to maintain your portfolio of oil pay off.

Being a relationship bank I think the important part of that is being out for your clients and being in front of them relationship banking is.

The key to maintaining margin.

And if we're on.

So as we as we come out of there are on our lenders are going to be very busy because they're gonna be out seeing everybody and.

Yeah on making sure that we're taking care of our clients need they can understanding their financing requirement. So that we can address them appropriately as we go forward in that.

We try to do that as you know.

By phone by do many things of that nature, but there's nothing better than actually going out of 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 of hit I suppose for every day, but certainly for us because that's.

How do we focus our.

Our our energies in managing our relationship so on.

Again confident as we come out of this debt that will improve the Tony you can comment a bit on the margin numbers.

Okay. Good morning, Jeff.

I think one of them you know you hit the nail on the head with the.

The P P P.

Fee recognition.

Pension being part of the issue this quarter.

And I do want to emphasize debt 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 are prepay.

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 MBS.

Securities fairly early on and Bill type of 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 he said.

It'll it'll be it'll be a drag of for sure in the first quarter, because we've got a lot of accelerated discount accretion to absorb.

Absorbed there, but then going forward as you know as Ross said, we're doing everything we can going forward to help the margin and that should be a contributor in that regard.

Okay.

And just.

Your your kind of wrap up comments on the M&A side.

You are active on the buyback and just wanted to.

Make sure I understand that.

You really can do both.

For the balance of 'twenty, one I mean, the fact that you are active in buyback doesn't necessarily mean, you're out of the M&A market or are you probably.

Of that or if some opportunities come about.

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

Yeah, I mean, it's.

We continue the buyback program debt.

Hum.

That's been the plan and we.

We think there are great opportunities for us to buy stock back, which is which is.

Because we still feel like.

Our stock is of is it has great value.

At the same kind of if there was an opportunity for any of them for M&A, but obviously, we would we would likely.

Put that on the buyback on hold is that.

What happened I really think of as I talk to.

That's the bank of community and other banks out of state. This is.

Well I heard I heard one person say to me one investment bankers day. 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 I'm confident with our current.

Stock prices has held up quite quite nicely.

And bank credit quality of position is on deposit franchise are so strong that we were very attractive acquirer to the banks that might want to partner up with I am we're certainly out there talking to everybody and.

See what presents itself and with each of them, but I am confident of 'twenty.

2021 will be a big year for NIM, M&A and certainly in California.

Great, Thanks, Russ and Tani true.

Yeah.

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 just.

Just wanted to get back to the reserve related question at one point to 7% ex PPP and acquired.

How should we think.

Think about that ratio and of course piece of world and where it might bottom and.

As it relates to that you know maybe for.

For good way of looking at it would be just the kind of weighted average rate that you're <unk>.

Setting aside on new production.

Of late.

Matthew I will ask them, that's horizon and Anthony to answer that one for Beth.

For staff I suppose.

Actually Tony why don't you start and then I'll fill in on its own.

Little bit more of an accounting question.

Okay sounds good.

So Matthew good morning, a day 127.

As of December 31st even though it says it excludes acquired an SBA P. P. P loans, because we're in Seattle right now acquired loans are actually under sea salt part and parcel of that ratio. So it's really just on the.

The difference between the one point 10 in the 127 is really simply the P. P P loans.

I'd say that you know we have we have qualitative factors.

If you will or qualitative considerations debt.

That takes into account the volatility of forecasting and on 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.

Digest, so we have on.

As I said, some some factors in for that to make sure that we have ample reserves.

Yeah.

Despite.

You know what the for Cat M.

How they might change but.

Or how the model might respond just why we get used to the model.

Yeah, I'll add on that.

This piece of the difference of seasonal or is there is a significant forecasting component.

<unk> forecasts improve that ratio could go down.

We would expect debt.

Okay I understood. Thank you.

And then can you remind us how much you have left in the way of net PPP related.

Net interest income.

Yeah.

Yeah, Tony can you answer that one.

Yeah.

Yeah, let me pull that number and you want for the quarter or for the year. The total P. P. P M.

No remaining just want to make sure on numbers are in the ballpark for what's left from that you can that youll realize on revenue not just around one of the main issue.

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 of run off.

Yeah, Let me, let me pull that number I'll come back to you and just one SEC.

Okay, No worries and then.

<unk>.

Oh Jeez I was gonna asking on [laughter]. Another expense related question and I know Todd of Youre looking for that number maybe just on the.

On the M&A front of.

For us can you just remind us.

The types of potential targets, you would like to consider in your on your pricing criteria.

Okay.

Well.

You know historically for a 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 day in the market.

The number of certainly shrunk.

Over the years.

And you know when we when we were pretty disciplined about the way we the way we operate and there's there's a there's a number of metrics obviously that is so important.

Earn back how.

How many years of keeping it under four years, certainly and I'm having.

Having it be accretive in the first full year, that's very important to.

<unk> to us.

And being a market that we think that they have.

On either is.

In the markets, we operate continues to or that we view as.

As good growth.

Market.

And we've been we've.

We've been clear about looking at looking at the possibility of of going South and also potentially going east.

It's just we have as all of that.

As a community bank at its really important I think as we look forward debt.

With margin compression of the way it is.

It definitely matters and being bigger and being able to spread your expense base over a larger base.

It is really important is going to be more important as we go for it I mean I don't.

I don't see.

See a lot of change in the interest rate environment over the next few years for sure.

So if you can't if you're getting.

On relatively low margin.

On the on the.

Portfolio then.

Then you have to be very cognizant of it they're expensive and so we've been we yes, we have an organization of always of very very careful about expense control and doing doing with doing what's right and to maintain our expenses but.

No.

You got to look forward in the future.

No that's gonna be.

It's really important for it to spread that over a larger base.

It's why I think M&A is going to be kind of if there's any a lot of activity.

And you know where we are sort.

We are interested in participating in the debt.

Great.

And then maybe just on the expense outlook Tony.

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 has remained relatively flat with that seasonal increase kind of offset by maybe some relief.

Reserving for unfunded commitments and then we drift lower from here from throughout the year.

You know I I E.

I don't know about the relief for the unfunded commitments Oh, I mean, you could you can always see some shift between unfunded commitments provisioning in me.

Noninterest expense line and then the provisioning for allowances on credit losses in the other lines. So they can you know shift back of course, depending on how the usage of commitments goes.

So you could have some fluctuation there that would lower expenses, but it might also and.

You know serve to increase of provision.

So I think when you know when Beth was talking about where the overall provision is going.

She was had both of those in mind.

We we typically have as he set a lot of noise in the first quarter on.

On the two.

401 K.

Contributions are due to the yearend resets and also the bonus payments that tends to be of pretty significant item.

Additionally, we have.

We calculate our bonuses for 2020 in the first quarter.

And on that.

That's the number that.

Is you know has yet to be determined and we have accrued bonuses that are fairly high.

High level. So we typically have some true up in the force in the first quarter around that as well.

So I'd say.

<unk> expenses.

In the in the first quarter.

Yes, youre going to have a lot of noise and 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 the normal fashion and youre going to have.

More expenses that were.

Hum that we werent able to.

Execute on in 2020 associated with that and Additionally, we have you know frankly.

Some things that got moved from 'twenty 'twenty into 'twenty 'twenty one because.

You know we had to we had to focus on the pandemic response and some of those other activities had to be moved so.

I think it's of great question.

There is a lot of change and it's going to be a transitional year.

Back on your P. P. T question, we have $5 4 million more in fees to a.

Recognize in 2021 as those loans are forgiven.

Okay. Thank you.

Yeah.

Okay.

Our next question comes from the line of Jackie Boland with K B W. Please go ahead.

Hi, good morning, everyone.

Good morning, John I wanted.

I wanted to start off with a quick housekeeping question before I get on more theoretical items.

Given the adoption of T cell that $22 million 874000, I wanted to clarify that that's associated with loans only or if it also includes the allowance on unfunded commitments and if the total ACL.

The 22 874 is the a C L, which is loans and securities only the unfunded commitments go into a different line item.

Okay.

Total we observe on the unfunded commitments is the $1.1 million.

Hi, Thank you for different things have different terminology, but I don't like to automatically of sale.

And then just net that's on might be for you right just thinking broadly about the pushes and pulls of took on a hot this year you know under.

Under the assumption on which I think is fairly consensus that we're going to be in one of our new normal environment looks like in the latter half of 'twenty, one and your bankers kind of eat with their customers. They space you've got loan growth kind of moving forward. How are you thinking about balance sheet fluctuation of three of the year I am also taking yeah, you're obviously right.

Active in managing on your deposit book on liquidity flow on so I'm, just wondering how youre thinking about that heading into the year through it.

So when you say balance you mean growth from the balance sheet will show growth from the standpoint of the loan totals and things of that nature.

I think just overall balance sheets, and whether you view loans or deposits as the largest driver of it.

Many of its size.

Oh, okay with deposits have been.

On a growing substantially over over this past year on I I I I believe as we get back into a more normal kind of that.

For the case that day.

And youll start seeing businesses being starting to be investing lending opportunity. So if I, if I had to make a prediction.

That would suggest that loan growth will occur more of the water half of the year.

Deposit growth will either either continuing to grow or maybe stay flat, maybe maybe continue to grow slightly through this through this year.

But.

Then it may flip flop, because I think that you will see more reinvestment you will see more of business kind of opening up that havent been of patterns.

Haven't been been operating so.

It's gonna be it for.

Okay.

Last year was a very strange here on this there will be oh, maybe not equally strength, but it will be.

You know the first half.

Sure.

A lot of our customers are still struggling with them, particularly those of hospitality as we've 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 to reinvest some of your feet of lending opportunities.

It'll it'll also.

We'll start to see how commercial real estate will be yet because.

Because I think the big question now is there's a lot of people working from home and will they all come back for the office will there be.

A lot more.

Working from home until of less need for commercial real estate and I think that that I think it's probably of hybrid.

For the people that I talk to most people are anxious to get back to see losses. So.

I think youll see that but I think there'll be an equilibrium that will reach.

Later in the year, where the.

The businesses that.

You know we will have.

Businesses will have a portion of their of portion of their.

Their employee base working remotely because we're seeing it does work.

But.

But the risks like if you look at it from our perspective of the bank.

The biggest risk of everybody being remote is the culture.

Our culture is very 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.

We're closely with our total.

Total employees.

In person.

Which you just lose something when you move up and so I think for a lot of businesses will be left with them.

You can see of first half of the year kind of continue.

Continuation of what was going on and then the second half.

We'll see we'll see it flow.

Return to a more normal.

That's kind of my thoughts.

Okay. Thank you that's net.

Great color and I can do you have any thoughts on.

I'm.

Sorry, it's the way going back to your provision on off balance sheet. The 1.1 was the provision for this for this quarter, but I wanted to give you. The total balance of the off balance sheet reserve in that 2.779 million.

You bet on the seven nine.

Great. Thank you.

Okay.

And just one last one for me on.

I just wanted to see if you have any preliminary thoughts on the pushes and pulls between normal seasonal trends on deposits first day, you know, adding additional PPP loans on a quarter on how that might impact the overall portfolio of deposits not alone.

Well I.

I think what you saw in the when CPP Christina was that there was a tremendous inflow of deposits.

So all of the PPP loans are made they go on those because the counts and we assume that they would just go away.

They were good but we haven't really seen that it's difficult for people.

Two of them.

Separate but you can see deposits from.

Normal, but I think there's kind of a combination of that.

That businesses are.

And any of it.

This is primarily R.

Our accumulated of deposits accused of accumulating cash and we've seen that throughout the year.

I think that will happen again with the with this new round of PPP, but it's clearly not going to be of.

Big of an event is the first time.

Well, we have had in too so maybe I could have you jump in and talk a little bit about the PPP fees I finished.

Sure we haven't had the numbers of it.

Applications for the dollars. So maybe Tim you could you could add to that on the PPP side, yes.

Yes of course, and if you don't mind I'll go back a second Jackie I think that's addressed some of this in your prior question one of the things that's affecting us as borrower behavior on conservatism in this environment, especially with our client base for our utilization on credit commitment on revolving credit for down significantly <unk> five point from 38 of 33 non app.

Average, but year over year.

And we continue to see we saw some PPP proceeds paydown of loans, just like Russ said, they increased deposits and cash is fungible and that gets really hard to to pull apart, but oh of $11 million of our payoffs last year were just borrowers applying cash so right now that's a very conservative mindset that for your question before.

As we and as Russ talked about we see that borrower a mindset change and the economy economic momentum pick up you know that's an immediate game to our our balance sheet on the asset side in terms of new of the P. P. P loans. We are as of this weekend have about 600 applications for processing for about <unk> <unk>.

78 million in total so thats.

Our average loan on the first round of about just north of 170000, that's 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 of Outstandings with a significant number of 950000 and below.

The new expedited process, while the government's rollout of form for that they're not able to accept that but we accept we expect that to both speed up the forgiveness process from the round one borrowers because 70 something percent of our borrowers were under that amount of first time and it will be a higher percentage of first time, probably closer to 80 per.

Uh huh.

That's great. That's incredibly helpful. Thank you everyone I appreciate it.

Welcome.

Yeah.

Okay.

And our last question I'm curious coming from the line of Tim Coffey coffee with Janney. Please go ahead.

Great. Thanks, Bob I just thought of.

Quick follow up on the Health card Health club loan on the two hotels.

Do you see these loans, having a pathway to cure themselves and that they just need the law of enhanced monitoring right now or is it just too early to tell.

I think I can answer that they'll have of the best Hum for that she's been.

She's been very involved with as you know it.

It's clear that you know nobody.

Nobody is.

I mean, they're shut down so do I see it but our cash per day for them to recover yes, I mean this seriously.

As soon as we get back to where we where people can go to Jim then you know I think the the.

But the critical have an opportunity to two for two of them.

Right themselves so to speak it's just you know for lack of for lack of a business out of it.

There is on outdoor activities that they have and they have.

On that but it's still pretty pretty tough so.

I do.

The other question the other thing of it.

I've seen we've seen lots of discussion in.

In the news and health clubs or suffered all of the country.

What would they look like after after Covid.

For people just go right back to that or will there will they see so.

I see a pathway out we have.

So again, we have very strong collateral base, but but I'm confident we can we can work through these and maybe Beth you can you could have for 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.

But again, that's why you saw our classified and non accrual increase in the fourth quarter. It was a 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 of hotels. We're also readying them for occupancy in the future. Some have been used by you know 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 and same thing with the health club.

Okay, Alright, well the rest 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.

You very much.

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