Civista Bancshares, Inc.

Good day and welcome to the Sophisticated Bank Shares fourth quarter and year end 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Dennis Schaefer, President and CEO. Please go ahead, sir.

Good afternoon. This is Dennis Schaefer, President and CEO of Savista Bank Shares, and I would like to thank you for joining us for our fourth quarter and full year 2020 earnings call. I am joined today by Rich Dutton, Senior Vice President of the company and Chief Operating Officer of the bank, Chuck Parcher, Senior Vice President of the company and Chief Lending Officer of the bank, and other members of our executive team. Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Savista Bank Shares, Inc. that involves risk and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute the most directly comparable GAAP measures. The press release available on our website contains the financial and other qualitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. We will record this call and make it available on Savista Bankshare's website at civb.com. Again, welcome to Savista Bankshare's fourth quarter and full year 2020 earnings call. I would like to begin by discussing our results, which were issued this morning. At the conclusion of my remarks, we will take any questions you may have. This morning, we reported earnings for the fourth quarter 2020 of $10.2 million, or 64 cents per diluted share, which represents an increase of $2.5 million over the prior year's fourth quarter. Our full year results were net income of $32.2 million or $2 per diluted share for the year ending December 31st, 2020, which is a slight decrease of $1 million compared to 2019. Our pre-tax, pre-provision earnings for 2020 was $47.2 million compared to $40.6 million for 2019, and represented the highest pre-tax, pre-provision earnings our company has ever achieved. Our strong capital position and continued ability to generate core earnings allowed our board of directors to approve an increase in our quarterly dividend by one cent to 12 cents per share earlier this month, which represents a dividend payout ratio of 24%. As we noted during our last call, our strong capital position allowed us to resume share repurchases during the third quarter. During the fourth quarter, we repurchased nearly 47,500 shares at an average price of $14.72 per share. Shares repurchased during 2020 totaled 826,947 shares or approximately 5% of the outstanding shares at December 31st, 2019 for $13.4 million. The weighted average price for the year was $16.16 per share. We view share repurchases as an integral part of our capital management strategy. As of December 31st, we have $11.5 million available from our repurchase authorization which was approved last May. Our return on average assets was 1.44% for the quarter and 1.17% for the year, while our return on average equity was 11.79% for the quarter and 9.57% for the year. Despite the continued low rate environment, net interest income for the quarter increased to $23.5 million, which was $1.5 million greater than the linked quarter and $2.3 million greater than the prior year. While our margin did contract in 2020 to 3.7% compared to 4.31% for 2019, it did rebound to 3.69% compared to 3.44% for the linked quarter. Our PPP loans and the accretion of deferred fees associated with them provide positive net interest income in dollars, but they do have a negative impact on our margin. PPP loans made up 11.7% of our average loans earning 3.9% for the quarter and 8.8% of our average loans earning 3.7% for the year. Without the PPP loans, our margin would have improved by five basis points to 3.74% for the quarter and by 16 basis points to 3.86% for the year. Non-interest income totaled $7.7 million for the quarter. This is an increase of $880,000 compared to the linked quarter and a $2 million increase compared to the same quarter in the prior year. Year-to-date non-interest income increased $5.7 million or 25.6% as well. The low interest rate environment continues to drive the mortgage markets across our footprint. During 2020, mortgage banking was the largest driver of non-interest income. Fourth quarter gains on the sale of mortgage loans were $3.1 million or 26.9% greater than the length quarter and $2.1 million or over 200% greater than the fourth quarter of the previous year. Similarly, the year-to-date gain on sale of mortgage loans was $8.6 million or 216.3% higher than the previous year. During the quarter, we sold $91.8 million in residential mortgage loans and at an average premium of 334 basis points compared to 84.1 million in the late quarter and 45.2 million in the prior year. Year to date, we sold $304 million in mortgages compared to 125.8 million in the previous year. As we head into 2021, our mortgage pipeline remains very strong. Other significant drivers of non-interest income were service charges on deposit accounts, interchange fees, and wealth management fees. Service charges decreased $1.1 million compared to 2019 levels. Overdraft income, which is included in the service charge category, decreased $1.1 million during 2020. During the pandemic, customer behaviors changed and fewer customers overthrew their accounts. And we also waived service charges on personal checking accounts during the early stages of the pandemic to provide relief to our deposit customers. Our service charges returned to more normal levels in both the third and fourth quarters. Swap fee income was consistent with both the linked quarter and the fourth quarter of the previous year, but was $943,000 higher when compared to the prior year. While non-interest expense was flat during the quarter and increased 5.6% for the year compared to 2019, we did see a decrease of 4.3% for the linked quarter. The year-over-year increase was primarily related to compensation expenses, which centered on annual pay increases that go into effect each April, commissions attributable to increased mortgage loan activity, and overtime associated with commercial loan modifications, increased mortgage activity, and our participation in the SBA's PPP program. Our efficiency ratio was a very respectable 53.7% compared to 60.7% for the length quarter and 59.1% year-to-date. At our current size and excluding income associated with PPP, we think of ourselves as a low 60s efficiency ratio organization. During 2020, our focus on controlling non-interest expense was aided by some of the COVID-related changes we adopted. Excluding PPP loans, our loan portfolio increased $58.4 million during the fourth quarter and $131.2 million for the year. That equates to an annualized growth rate of 13.1% and 7.7% respectively. We are pleased with our loan production, which occurred in every market across our footprint and was spread across every commercial category. As the pandemic continues, it is difficult to project how the larger economy and more specifically, our loan portfolio will grow in future quarters. However, we remain optimistic. Our loan pipelines remain consistent with $126.8 million in approved undrawn construction loans at December 31st. With respect to PPP-1, we originated over 2,300 loans for $259.1 million resulting in SBA fees of $9.9 million. As of December 31st, 2020, 322 loans with a principal balance of $37.5 million had been approved for forgiveness by the SBA and were forgiven. Of the $9.9 million in fees related to PPP-1, we recognized $4.7 million in 2020 with the remaining expecting to be recognized in 2021. With respect to P2, we began accepting applications on January 15th. Through the end of January, we had received 945 applications with 427 of those applications approved and funded for a total of $54.7 million. In regards to COVID-19 loan modifications, As the CARES Act was rolled out, you will recall SOVISTA took a very proactive approach, offering 90-day modifications on over 800 mostly commercial loans, totaling $431.3 million, which represented 24.4% of our commercial loan portfolio at June 30th. Since that time, we and our customers continue to gain a better understanding of the impact of the pandemic on their business. As a result, most have resumed making their contractual payments. At December 31st, we had 55 loans totaling $73.8 million or 4% of total loans net of PPP loans in payment deferral programs. The largest concentrations of these loans are $43.6 million in hotel, $11 million in mixed retail office, $5.1 million in mixed retail residential, and $5.1 million in restaurant loans. All of these programs, the PPP-1 and the PPP-2, as well as the CARES modifications, are part of our commitment to working with our customers and helping them as they cope with the pandemic. I couldn't be more proud of the efforts that all of our employees have put into these programs, as well as just running the bank on a day-to-day basis. to provide banking services that our customers need in these trying times. During the third quarter, we automatically downgraded each of the commercial loans that requested concessions beyond the initial 90-day modifications. This resulted in nearly $108 million increase in our criticized loans from second quarter to the third quarter. We continue meeting with our customers to better understand how they have been impacted by the ongoing pandemic, and their plans for operating as we move forward. That said, our total criticized loan portfolio, which includes all classified and substandard loans, increased by $10.9 million to $148.1 million at December 31, 2020. The largest segment of criticized loans are hotels, totaling $74.2 million. While we have downgraded risk ratings on many loans, We have yet to see any specific defaults or increased loan losses. Given the uncertainties associated with the COVID-19 and its impact on the economy, we continue to review and refine the qualitative factors in our allowance for loan loss model. As a result, we recorded a $2.25 million provision expense for the quarter and a $10.1 million provision expense for the year. The ratio of our allowance for loan losses to loans increased from 0.86% at year end 2019 to 1.22%. Exclusive of the PPP loans, this ratio would have been 1.36%. Our allowance for loan losses to non-performing loans also increased to 343.05% at the end of the year from 161.95% at the end of 2019. While these reflect very strong credit metrics by historical standards, given the uncertain nature of our current economy, we will continue to monitor our portfolio and the economy, making further adjustments as our model dictates. As a reminder, we did meet the guidelines for the delayed implementation of CECL and will not be required to adopt it until 2023. On the funding side, our deposits increased 510 or 30.4% since the beginning of the year. While we have seen increases in every deposit category, $173.4 million of the increase came in our business checking accounts where the proceeds from the PPP loans were deposited, and $85 million of our year-to-date deposit growth came in personal checking and savings accounts. The increase in deposits allowed us to reduce our reliance on our FHLB advances by $101.5 million, or 44.8% since December 31st. In addition, during the second quarter, we borrowed $183.7 million from the PPP liquidity facility to assist with the funding of the PPP loans originated. These borrowings were repaid in November. In spite of the challenges that 2020 brought to all of us, we are pleased with another year of solid core earnings. I continue to be proud of the great team we have assembled and the quality customers that we have chosen to work with. Among our accomplishments during 2020 are helping our customers navigate through the first and now second rounds of the PPP process, our continued focus on improving our customer experience through a number of digital initiatives aimed at improving customer communications, adding better tools which will enable a digital transformation for how we deliver treasury management services to our commercial clients, as well as how we deliver our retail services to our consumers. We expect to roll out many of these new digital tools in the second quarter of 2021. All of these accomplishments happened while learning to work under conditions we had planned for but never really thought we would endure, especially over the last nine months. While the next several months will continue to test the banking industry and the larger business world, I am confident that Savista is well positioned with a solid balance sheet, strong capital levels, and diverse revenue streams to meet the challenges that lie ahead. Thank you for your attention this afternoon, and now I will be happy to discuss any questions that you may have. Thank you.

We will now begin the question and answer session. To ask a question, you may press star and one on your touch-tone phone. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star and two. Today's first question comes from Michael Schiavone with KBW. Please go ahead.

Hi, good afternoon. Thanks for taking my questions. Hey, Michael. So you guys still have the majority of your April share repurchase authorization outstanding. I think you said $11.5 million. And you were pretty active during 2020, which was a pretty challenging year. So is there any reason we shouldn't expect that strong pace of buybacks to continue in 2021?

Yeah, I think we view that as a great way to deploy our capital as long as our earnings remain strong. And I think we've got a pretty good comfort level with our credit quality. I think you'll continue to see some activity there with our share repurchases.

Okay, thanks. And then on the NIM, can you tell us how much pressure you're still seeing still experiencing on the loan yield at this point. And then on the funding side, if there's still any opportunity to keep driving those rates down and just overall trying to get an idea of where the coordinate might go from here, excluding PPP.

Okay. Yeah, we've done a pretty good job of protecting the margin. I'll have Chuck Parcher, our Chief Lending Officer, comment on pressure on the loan yield. Rich Dutton can comment on maybe on the deposit side. So, Rich or Chuck, you want to talk a little bit about?

Sure. Yeah, we're still seeing, you know, quite a bit of pressure, Mike, especially in some of the larger markets, the hotter markets, Columbus being one of them, really competitive down there on deal flow. So, we're seeing that pressure. We're seeing a little bit of pressure where people are going a little bit longer on balance sheet as well. You know, so we're continuing to evaluate that, but, you know, if it comes down between growth and holding margin, we're trying to hold margin more so today than we are trying to excel growth from that perspective.

Mike, this is Rich. And on the funding side, I mean, we say it every quarter that it's just going to be hard to eke out more basis points on the funding side. And it seems like every quarter we find a way to do it. I'd have a hard time telling you that we're going to drop the funding costs much more than basis points again in the next quarter. I mean, I think we're kind of at that point where we're going to be, and there is going to be some compression. But, again, I think we saw the compression really in the second quarter last year on our margin and kind of held our own, notwithstanding all the noise of the PPP and the amortization of those fees through there. And we've kind of settled into a range where I think, you know, kind of 7-4 range, if you kind of normalize it for PPP, is kind of where we're at and where we expect to be. I mean, it might drift down from there, but it's not going to be anything significant, I don't think.

Thanks. That's really helpful. And that's all I have. Happy Friday, guys.

Okay. Thanks, Michael. Thanks.

And our next question today comes from Terry McEvoy with Stevens. Please go ahead.

Hey, guys. How are you today?

Good. Hello, Terry.

Hello. I guess when I think about the reserve build in the fourth quarter, and then something in the text kind of caught my eye where you said you've yet to see any specific loan losses. Are you kind of suggesting through the reserve build and the comments that the charge-offs will likely trend higher a little bit from here? And maybe what are your thoughts on full-year net charge-offs?

Yeah, I'll let Paul Stark, our Chief Credit Officer, comment. I don't think, you know, we're implying that charge-offs will be any higher. I think, you know, the reserve bill, you know, ours has been kind of a slow build throughout the year. You know, there's a couple of things that happened. You know, initially, when the pandemic broke, that second quarter, there were businesses that were completely shut down. You know, they had no revenue. Unemployment was rising. You know, we adjusted our qualitative factors in our reserve to account for that. We go into the third quarter, and the beginning of the third quarter, deferrals are rising. So you've got higher deferrals. So again, we adjust our qualitative factors kind of to account for that. And then this last quarter, you know, we feel we've got a really good handle on our book of business. Deferrals are hovering right around that 4% range or so. And, but risk rate changes. So we've had a number of risk rate changes. So we've had to adjust the qualitative factors as we've gone, but we still see zero delinquency in our book. I mean, there's very little delinquency. So we don't see, I don't think, much credit loss coming. I'll let Paul add some cover around that.

Well, he's covered most of it, but I think difficult to tell what's going to happen as we get through this. I mean, obviously this pandemic has extended out this temporary period. And so there's still a number of hotels, which is our biggest segment of the portfolio that we're working with, that business travel and leisure travel should pick up, but it's not going to pick up as fast as the people originally thought. And so right now we feel pretty good about their ability to sustain these payments as we've helped modify some of these interest-only payments. But at the end of the day, some may actually fall. But right now, I think we've identified everything we can, and we'll continue to work on this on a month-to-month basis.

And I think our deferral percentage, too, Terry, it was at a high point of 24%, a little above 24%, right around 4%. Eeked up just a little bit. I think that's related to some of the seasonal businesses that we have within our footprints, for instance, in our headquarters market here. You know, we do some, you know, we have Cedar Point, there's all the islands, Lake Erie Islands and stuff, and there are some seasonal businesses there that I think we just extended out deferrals for, so.

Yeah, you gotta keep in mind that the first round we deferred over 400 million, the second round about 125 million. And by the end of the month, by the end of the quarter, that's the 52 million you've seen, that we're still in effect at quarter end. So in reality, we're looking longer term now that this is extended. And so that number's high, but it's actually a reduction from the second quarter deferral program, or the second round deferral program, I should say.

That's some great color. Thank you. And then just as my follow-up, a question on expenses. A fair amount of, as I look at the text here, there was lower marketing, lower travel, and just COVID positively impacted the expense trends. With the underlying assumption that things slowly return to normal, could you just talk about what that means for expenses in 2021? And then the digital tool that was mentioned in terms of rolling out in the second quarter, will that have an impact on expenses as well?

Yeah, Terry, this is Rich, and you're right. I mean, the COVID and how fast the vaccine gets distributed and how the economy reacts to that is the big question. And so I think we're probably looking at a number of things kind of returning back to normal, and you're right, it's going to be travel, it's going to be education, it's going to be marketing, but how fast that happens, we're not sure. So I still haven't answered your question. Q2, which is the biggest part of our digital transformation, is something that we did kick off in a big way during the fourth quarter. That's going to be about $200,000 of expense per quarter, and we're not going to roll that out until probably sometime mid to late second quarter. And certainly any additional revenue that we enjoy from that transformation is not going to happen instantaneously. It's going to build. But certainly we're looking at $200,000 of additional expense related to that per quarter. That's probably the biggest thing going forward. I think our insurance expense on the health care side, we saw a decent increase there. I mean, everybody saw them. I think ours was probably less than most. But I think COVID has kind of taken a toll on the way the insurance guys are looking at that, and they came back with some pretty decent increases. I think we're expecting probably about a $350,000 per quarter increase increase in our health care for next year. Those are probably the two biggest things going forward that I do know.

Yeah, we're taking a hard look, I think, Terry, at expenses. I mean, we've identified a few things, I think, that, you know, moving forward that we'll be able to reduce expenses on. But we are making substantial investments into our digital technology and into technology that improves the overall customer experience. And as Rich alluded to, you know, you bear some of that expense and you don't recognize some of the revenue or even the cost savings until later on. One of the other projects besides the digital that we have going on was an upgrade in just all of our customer communications that we're sending out to our customers. And that's really upgrading that, and it's going to allow us also to electronically deliver, statements, invoices, so that we'll eventually pick up, we'll be able to reduce postage expense, we'll be able to reduce paper expense. There's little things that we'll pick up with the digital technology that we talked about on the income side, you know, we'll recognize some of that revenue, you know, in the latter half of the year, starting in the latter half of the year, because hopefully we add more accounts with that and we pick up more service charge income and, you know, our cards are, you know, loaded into the digital wallet and we pick up more interchange income and stuff. But we're going to continue to invest So that's why in my comments I said we're probably going to be a low 60% efficiency shop because there's things we need to do to get us to that next level. So it does require investing back into the company.

Thank you very much and hope you all have a nice weekend. You too.

Thanks. And our next question today comes from Nick Cucciarelli with Piper Sandler. Please go ahead.

Good afternoon, gentlemen. Hope you're doing well.

Hey, Nick. Hi, Nick.

With the tax business jumping into full gear in the first quarter, can you just share with us your expectations for that business and how it compares with prior years?

Nick, it's going to be exactly, I mean, our expectations are exactly what we did last year. And if you'll recall, I mean, we've got contracts in place, and I would expect that it would be spot on to what we did last year.

That's terrific. And then within the mortgage banking business, you had a big gap up in the gain on sale margin compared to the third quarter. Was this mostly a function of mix?

No, I don't think it was a function of mix. I look at our mix, it's been pretty consistent all year long. It's just we had quite a bit of volume built up through the summer. Our refinance business got lagged out to about a 90-day period. as far as from origination to close. A lot of that stuff just built up over time that we got done in the fourth quarter as we continue to pick that up. With our pricing, we were getting a little bit more on a re-buy than on a purchase, and we did increase our pricing a little bit going in the third and fourth quarters. It would have been beneficial in the fourth quarter, so that's a little bit of the gain on sale increase as well.

Yeah, we were able to substantially increase the pricing, you know, and that's why I think we were at 336 basis points or something. You know, if you would have looked at us 12 or 18 months ago, we were at 220 basis points or so. So I think we did a really nice job there. We, you know, Fannie increased what they were, you know, charging, and we were able to kind of pass that on and still really see no dip in volume and pipelines remain very strong.

Yeah, that's great news. Okay. So, so even in spite of the strong loan growth and repurchasing 5% of the stock in 2020, you know, your total risk-based capital level was largely unchanged from the end of 2019. So I heard your commentary on incremental repurchase, but can you refresh us on your capital priorities and how you're thinking about an ideal level of capital?

Yeah, I mean, we've always said, you know, we'd like to keep that capital ratio somewhere in the nine to nine and a half percent range. Maybe as we, you know, in the midst of a pandemic, you like to keep a little bit more. But, you know, our thoughts really haven't changed too much on that. As long as our earnings remain as strong as they are and our capital position remains as healthy as it is and we feel comfortable with our credit quality, I think, you know, we'll deploy capital through the repurchase program. We think that's a great way to do that. We'll continue. We think that we'll continue to remain committed to that dividend. I think we need to do that with the earnings that we're recognizing now. And then I think we continue to look at M&A opportunities. You know, some of that... In finding the right partners, I think we're taking a little bit more proactive approach to that and reaching out. But for us, I don't want to do a deal just to do a deal. It's got to make sense for this organization. It's got to make sense for our shareholders, and it's got to be a cultural fit because deals, you know, a lot of deals that aren't cultural fits, they just don't work. Right. But those are kind of how we look at deploying our capital.

Thanks for taking my question.

You bet, Nick.

And our next question today comes from Russell Gunther with DA Davidson. Please go ahead.

Hey, good afternoon, guys. Hey, Russell. Hi, Russell. I was hoping to follow up on the core margin commentary, that low 370s XPPP. Can you spend a little more time on the glide path and how you expect that to progress over 2021 and what the drivers are? You know, understand the funding is largely played out, but whether it's, you know, earning asset remix and timing and I think some more clarity would be helpful because that 370 is well above where consensus is coming into the quarter.

Well, I mean, that's what we did, right? If we reported 369 for the quarter, And we said that, you know, the PPP put a five basis point kind of drag on that. So I guess normalized, if you will. And I guess there's a lot of PPP noise and there will be for the next year. But 374 is kind of where we came in at. I think, like Chuck said, the pressure is going to be how well we do and our lenders do putting loans on the books at a reasonable rate. And as far as a glide path, I mean, again, I said, you know, basis points, and it's not going to be, again, if you look at the last year, Russell, when we had a pretty significant contraction during Q2 and then kind of, I want to say leveled off, but it certainly was much more muted in terms of the compression that we had in the margin from the second to third and then from third to four. And I think that's kind of, I guess, if you're looking for an indication of a glide path, that would kind of be where I'd guide you to. If we, I guess if I go through that same math, I guess we had about a 10 basis point contraction from Q3 to Q4. Maybe that's a reasonable thing to look at going forward, but it won't be, I would be surprised if it was more than that. How about that?

Diligent here. Yeah. I was going to say, Russell and Chuck, we've been pretty diligent about, in this low rate environment, you know, building some floors in so that we we can keep that you know hold the margin a little bit um like i said before we're looking at going a little longer on on the right deal not all deals you know to pick up a little bit more a few more basic points on margin don't want to really sell the balance sheet short long term but we've got some opportunity with this widening of the 10 years compared to the five to actually pick up you know some some some basic points that we feel are valuable. So we're looking at it every day, but we feel pretty confident that we can maintain the loan margin pretty well.

That's very helpful, guys. Certainly a better result, and it sounds sustainable. So I appreciate the color there. On the loan growth side of things, understand the uncertainty in your prepared remarks, but maybe just talk a little bit about what your organic growth expectations are what you'd expect to drive that both from a mix and geographic contribution.

I would tell you we're still targeting that mid-single-digit loan growth piece, Russell. I feel like we may be a little soft in the first quarter. We know we've got a few large projects that will pay off, and we also have already seen the effects of Every time we do one of these rounds of PPPs, as that money comes in, it rolls out and pays down our commercial line to credit. So we're already seeing some reductions in our commercial lines here in January and early February. So I think we'll see a little pressure from the growth perspective first quarter. But long term, as I look at our pipeline, our pipeline today was bigger than it was at this time last year. So now it's got a little bit different mix to it. I would tell you it's a little bit more construction, which also means that we'll see more of that growth you know, towards the mid to back half as those things start to get built as compared to, you know, up front. But we still feel confident, and, you know, in the markets we're in, we had a great year last year on the three Cs, greater Cleveland, greater Columbus, greater Cincinnati. We had really nice, strong loan growth across all those markets, and we don't see that diminishing here at any time in the near future.

That's great. Very helpful. And just one kind of follow-up tangential to that. Do you Are you able to share kind of the mix of your loan portfolio and how that breaks down within your more urban metro markets versus rural, what that contribution is from a commercial perspective?

I don't have that number right in front of me, Russell. We can probably get back to you on that. But I would tell you that it's – I'm trying to eyeball it just by looking at a couple numbers here. But we're probably any more – This is shooting off the hip about 70% metro as compared to rural. That's correct. That's in terms of balances. In terms of balances, yeah. Not in terms of number of customers. Obviously, the number of customers in our rural legacy markets are number-wise bigger, but obviously the loan volume, the loan outstanding numbers are much bigger in the metro region.

Russell, we don't have it in front of us, but if you look at our investor deck, Toward the front of that where we've got that kind of map, I believe we've got a summary of loans by region, and it kind of shows you which ones are rural and which ones are more urban. But we'll be better prepared the next time you ask us that question.

But that's right. It is about a 70-30 flip on the balance.

I appreciate it, guys. Thanks for pointing me in the right direction as well. That's it for me. Take care.

Thanks.

Thank you.

And our next question today comes from Joe Plozelic with Bennington Scattergood. Please go ahead.

Good afternoon, everyone. How is everybody?

Good.

How are you, Joe? A couple quick questions. One, you commented about the 60%, low 60s efficiency ratio, but, I mean, you know, it was such a strong fourth quarter, a lot of good stuff happening. But it seems like if you're still doing a pretty good job of controlling expenses with NIM being a little bit better than people thought, and at least mortgage banking remains strong in the first half of the year. Is there a chance we could see actually a five handle on the efficiency ratio here for the full year in 2021?

Well, we'll have to see. I mean, a lot of that depends on how quickly, you know, things return to normal because some of the expenses I think that Rich talked about, you know, you know, travel and entertainment and things like that that were virtually nothing, you know, how quickly do they return and stuff. So there is a chance because if mortgage banking, you know, stays as strong as it was, you know, we anticipate maybe that that falls off some in the second half of the year. But right now the pipelines are very healthy. So, you know, I think there's always a chance, but some of it's so, you know, some of that, kind of dependent on what happens with the pandemic and when things return to normal. Same with, you know, we're saving on business promo and things like that. You know, people aren't hosting events and stuff. So there's a lot of expense savings, I think, that are related to the pandemic.

Ed, you talk about how... how robust mortgage banking is. Any specific color on what the first quarter or first half might look like relative to the fourth quarter? It just seems like things came in so strongly in the fourth quarter. Just trying to get a sense directionally and absolutely kind of where the next couple quarters might shake out.

Our pipeline is really good still, Joe. It's going to be hard to replicate the fourth quarter, obviously, but I would think the first quarter and especially into the second quarter, you know, it's just a matter of how fast can we process the loans to get them through the pipeline. So I would say it's going to remain very strong, you know, first and probably second quarter as well after we get past that. And as you know, it's a crapshoot to see where rates are going to go.

All right. Thanks. Then the other two I had, one just on the deferrals. You know, you talk about how there's some seasonality and whatnot impacting the fourth quarter deferrals. flows. Any kind of directional thoughts on what deferrals might look like at, say, the end of March here, and any concerns that you've seen a new surge in requests or other kind of activity there?

This is Paul. You know, it's hard to tell. Right now, I don't anticipate any spike-up. I think we, you know, there's a steady process of working with customers And as things change, you know, in terms of when they think revenues, you know, are going to start to return, hotels being a great example of that, restaurants when the restrictions are eased, things like that, then, you know, these guys are actually very cooperative, and that's what we look for. And, you know, they want to start paying as quickly as they can. So most of our deferrals are actually just the principal type deferrals. You know, very few P&I deferrals. So, you know, I guess I would see this thing as pretty steady and, you know, some will be return to payments and we'll probably have to defer some others. So it really gets down to what the individual business cycle is and when, you know, what type of relief they need. But so far, you know, we have not seen any defaults and we have not, you know, really seen anything that we think is going to evolve into a charge off at this point. We're encouraged by that. We're encouraged by the fact that we think unemployment is expected to improve over the next quarter. Again, we take it month to month.

I would add that the one nice thing is back when we were originating hotel loans, we were very diligent about understanding the sponsors. As we're going through this process and the meetings we have, most of our sponsors have the wherewithal just to make those payments, you know, when called upon or tapped on the shoulder. So, you know, we feel good about the sponsors behind almost our entire hotel book.

Great. Thank you. And our next question today comes from Bryce Rowe at Hobby. Please go ahead.

Thanks. Good afternoon.

Afternoon, Bryce. Hi, Bryce.

Hi. Just one more question on the hotel business. Before I move on to another question or two, what is the weighted average LTV within that portfolio currently?

I don't have that in front of me. We're talking about 20 loans. Typically, I would give you a range. It's probably between the 58% and 65%. It varies based on the situation. Most of them are the major flags and as Chuck indicated, real good not only capacity but willingness to support the loans.

We've taken a number of those hotel loans through that SBA 504 program. You generally start out at like a 65% loan-to-value. 50% loan to value because they put in, you know, they take 35% and the borrower has to put in 15%. So we've done a number of them at that level as well.

Okay. That's helpful. I wanted to, I wanted to ask about the, the deposit side of things. And obviously you've had some really nice growth in, in 2020 and, I'm curious on kind of the deposit mix and where you might see opportunities to potentially continue to lower costs there. I mean, you look in the average balance sheet schedule within the release, and it looks like the time deposits are still carrying a 1.5% type of cost. So just maybe you could talk through the retention level of CD customers, what's maturing, and what the current rate is for those maturing CDs.

Well, that's where the opportunity is, would be in that CD bucket. I think in our ALCO working group, we identified that we may be able to get about four or five basis points more eek out of that. Some of those rates, as you said, are one and a quarter, one and a half still. Most of those were written for 18-month terms, so they'll be coming due sometime over the next six months or so. Current rates are down clearly around 40 basis points. Surprisingly, we keep a good number of those CD customers. They're just loyal customers that the bank has, And we still keep some of those. So I'm looking at our rate sheet today. Our 18-month special is 40 basis points, and we have a 13-month special out there. Is it a 13-month? Yeah, 13 months. We have 30 basis points. So, you know, those rates have dropped substantially, so there is room for improvement there. As far as the growth in those accounts, most of them have been core accounts. As we alluded to, $173 million in business deposit growth, $85 million in personal checking accounts. And the nice thing about that is some of that non-interest income growth was in our treasury management services. And that's just recurring income that we're going to get every year. We have very little reliance on CDs, and I think we're going to continue with the same strategy. We want to add as many core accounts as we can because that's where we got opportunity on the non-interest income side in terms of interchange fees, in terms of service charges, and we think that's very valuable. That's why we've been able to push up over the last three or four years our non-interest incomes.

Okay. I wanted to ask about PPP2 here. You noted $55 million, give or take, of approvals so far. Just, you know, how are you thinking about maybe relative to PPP1 that was, you know, $260 million, give or take, do you think that, you know, the PPP2 originations will approximate half of what you did, PPP-1, or could it be less than that?

Well, I think we're probably going to be at half. If you look at even where we're at today, I think I looked at some numbers right before we came in. I think we were at about 1,035 loans. And in PPP-1, we did 23, a little over 2,300. So we're getting pretty close to that half level, and we're tracking them on a fee basis and everything. So we're right about at that mark. That surprises me. I thought when this rolled out, and I think Paul and Chuck echoed the same thoughts, that maybe we would do half of that volume. Looks like we're going to probably do maybe a little bit better than that.

Well, the volume and number of loans, but in terms of actual outstanding, the average size of the loans have dropped this round. It's part of it because the SBA put restrictions on the maximum amount, and they really are trying to emphasize smaller borrowers. Right. Plus, it's a lot more labor to go through this. They didn't do anything to simplify it for us, but by and large, I think those numbers are correct. It started to taper off a little bit in terms of demand, too, so we'll see how this all plays out because it's definitely more slow-moving than we thought it was going to be.

Okay. Last one for me, Dennis. You had some commentary around M&A and wanting to possibly deploy capital into some M&A that might make sense. I was wondering if you had some conversations with potential partners, very informal conversations, but just maybe talk about the type of chatter you might be hearing. these days as we started to kind of come out of this COVID period and as bank valuations, bank stock valuations have been through the last few months.

Yeah, and I think that's part of my daily chores is to proactively reach out. I mean, we're, you know, we've identified some potential who we think would be very good partners. I would tell you that I think the conversation, people realize the challenges that that lie ahead, I think much more so today than they did even 12 months ago. Some of my conversations with some of my counterparts at the other banks, they recognize that, hey, when PPP income goes away, when mortgage activity returns to a more normal level, particularly in this low rate environment, there's going to be substantial pressure on margin. And I think it's going to be very difficult for some of these banks to make money. So, you know, given that, I think they realize that. So we've had some, you know, I've had some, you know, some pretty decent conversations with people in regards to what the future might look like. You know, we kind of try to share our vision. We think we'd be a great fit for quite a few of these community banks. In Ohio, there's 130 banks that are under $500 million in asset size. We think we would be great partners for those organizations as opposed to somebody that may be at $5 billion in assets or $6 or $7 billion in assets because I think we'll be a little bit more sensitive to their needs and you know, because I think it's got to work for both banks, and it's got to work for the shareholders, it's got to work for the communities, and it's got to work for the employees. It's got to be that cultural fit, and I think we will be the ideal partner. There's not only opportunity just in Ohio, I think eastern Indiana, you know, we've had some conversations with banks in Indiana, and we've, you know, southern Michigan, northern Kentucky, those are all I think, possibilities for us. That's great, Colin.

Thank you. Y'all have a good weekend. You too.

Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to Mr. Schaefer for any final remarks.

Thank you. In closing, I just want to thank everyone for listening in and thank those who participated in the call and asked questions. Again, we are extremely, extremely pleased with the results of our fourth quarter and for the entire year. 2021, I think, will undoubtedly be another year full of challenges for us, but we look forward to meeting those challenges and to talking to you again in a few months to share our first quarter results. So, thank you for your time today.

Thank you, sir. This concludes today's conference call. You may now disconnect your lines and have a