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Civista Bancshares Inc (CIVB) Q4 2020 Earnings Call Transcript

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CIVB earnings call for the period ending December 31, 2020.

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Civista Bancshares Inc (CIVB -1.97%)
Q4 2020 Earnings Call
Feb 5, 2021, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Civista Bancshares' Fourth Quarter and Year-end 2020 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions.

[Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Dennis Shaffer, President and CEO. Please go ahead, sir.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our fourth quarter and full year 2020 earnings call. I'm 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 Civista Bancshares, Inc. that involves risks 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 quantitative 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 Civista Bancshares' website at civb.com.

Again, welcome to Civista Bancshares' 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 $0.64 per diluted share, which represents an increase of $2.5 million over the prior year fourth quarter. Our full year results, were net income of $32.2 million or $2 per diluted share for the year ending December 31, 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 $0.01 to $0.12 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 31, 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 31, 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 third quarter -- for the linked quarter.

Our PPP loans, in 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 linked 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 at an average premium of 334 basis points compared to $84.1 million in the linked quarter and $45.2 million in the prior year. Year-to-date, we saw $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 fee, 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 over drew 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 return 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 PPP program.

Our efficiency ratio was a very respectable 53.7% compared to 60.7% from the linked 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 noninterest 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 31.

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 31, 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 PPP 2, we began accepting applications on January 15. 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 Civista 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 30. 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 31, 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 low 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 point -- 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 $510.6 million 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 deposits, 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 31. 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 customer -- 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 accomplices happened while learning to work under conditions we had planned for but never really thought we would endure and 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 Civista 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.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions].

Today's first question comes from Michael Schiavone with KBW. Please go ahead.

Michael Schiavone -- KBW -- Analyst

Hi, good afternoon. Thanks for taking my questions.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Hey Mike.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Hello Michael.

Michael Schiavone -- KBW -- Analyst

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 is a pretty challenging year. So is there any reason we shouldn't expect that strong pace of buy back to continue in 2021?

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Yeah, I think you know 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 we'll continue to -- you'll continue to see some activity there with our share repurchases.

Michael Schiavone -- KBW -- Analyst

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

Dennis G. Shaffer -- Chief Exeuctive Officer and President

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

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Sure. Yeah, we're still seeing quite a bit of pressure Mike, especially in some of the larger markets, the harder 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 in that perspective.

Rich Dutton -- Senior Vice President, Chief Operating Officer

Mike, this is Rich, and on the funding side, I mean we say it every quarter, 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 with -- notwithstanding all the noise of the PPP and the amortization that seems to be there, and we kind of settled into a range where I think -- I think you know that 3, kind of 74 [Phonetic] 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.

Michael Schiavone -- KBW -- Analyst

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

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Okay, thanks Michael.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Thanks.

Operator

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

Terry McEvoy -- Stephens -- Analyst

Hey guys, how are you today?

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Good. Hello, Terry.

Terry McEvoy -- Stephens -- Analyst

Hello, I guess when I think about the reserve build in the fourth quarter and then you know 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 to the reserve build in 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?

Dennis G. Shaffer -- Chief Exeuctive Officer and President

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 build, 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. 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, in the beginning of the third quarter deferral was 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, 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 color around that.

Paul Stark -- Chief Credit Officer

Well, you've covered most of it, but I think it's 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 people originally thought, and so right now we feel pretty good about their ability to sustain these payments as we help modify some of these interest-only payments. But in the bank you know 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.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

And I think our deferral percentage too, Terry, you know it was at a high point of 24%, a little above 24%, right around 4%. You've got just a little bit and I think that's related to some of the seasonal businesses we have within our footprint. For instance in our headquarters market here, you know we do some -- you know we have Cedar Point, you know 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.

Paul Stark -- Chief Credit Officer

You got to 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 were still in effect at quarter end. So in reality you know we're looking longer term now as this is extended, and so you know that number's higher. It's actually a reduction from the second quarter deferral program, the second round of deferral program I should say.

Terry McEvoy -- Stephens -- Analyst

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, you know there was some lower marketing, lower travel and just COVID positively impacted expense trends. With the underlying assumption that things slowly returned 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?

Rich Dutton -- Senior Vice President, Chief Operating Officer

Yes 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 third quarter. That's probably the biggest thing going forward.

I think our insurance expense on the healthcare side; we saw a decent increase there. I mean everybody saw it and like ours is 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, like we're expecting probably about a $350,000 per quarter increase in our healthcare for next year. Those are probably the two biggest things going forward that I do know.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Yeah, we're taking a hard look I think Terry at expenses. I mean we 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. 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 you know we'll eventually pick up -- post -- we'll be able to reduce postage expense, we'll be able to reduce paper expense.

You know there's little things that will pick up with the digital technology that we talked about on the income side. You know we'll recognize some of that revenue 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 our cards are you know loaded on to the digital wallet and we pick up more interchange income and stuff.

So we're going to continue and invest back in, so that's why in my comments I said we're probably go to be a low 60% efficiency shop, because there are things we need to do to get us to that next level, so it does require investing back into the company.

Terry McEvoy -- Stephens -- Analyst

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

Rich Dutton -- Senior Vice President, Chief Operating Officer

You too, thanks.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Thanks.

Operator

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

Nick Cucharale -- Piper Sandler -- Analyst

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

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Hey Nick.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Hi Nick.

Nick Cucharale -- Piper Sandler -- Analyst

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 to prior years?

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Nick, it's going to be exactly -- their expectations are exactly what we did last year. And if you 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.

Nick Cucharale -- Piper Sandler -- Analyst

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

Paul Stark -- Chief Credit Officer

No, I don't think it was a function of mix, because I'm looking at our mix and it looks pretty consistent all year long Nick. It's just, we had quite a bit of volume built up through the summer. You know our refinance business, you know we got lagged up to about a 90 day lag as far from origination close. A lot of that stuff is built up over time that we got done in the fourth quarter as we could do to pick that up.

So we are -- with our pricing we were getting a little bit more on the refi's and on a purchase and we did increase our pricing a little bit. Going into 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.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

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 were to look 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 fairly increased what they were charging and we were able to kind of pass that on and still really see no dip in volume and pipelines remained very strong.

Nick Cucharale -- Piper Sandler -- Analyst

Okay, that's great news, OK. So even in spite of a strong loan growth and are purchasing 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. Can you refresh us on your capital priorities and how you're thinking about an ideal level of capital?

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Yeah, I mean we've always said you know we'd like to keep that capital ratio somewhere in the 9% to 9.5% 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 well haven't changed too much on that. As long as our earnings remained 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 -- 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 [Technical Issues] 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 make sense, it's got to be a cultural fit, because deals -- a lot of deals that are a cultural fit, they just work, so. But those are kind of how we look at deploying our capital.

Nick Cucharale -- Piper Sandler -- Analyst

Thanks for taking my question.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Good Nick.

Operator

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

Russell Gunther -- D.A. Davidson -- Analyst

Hey, good afternoon guys.

Rich Dutton -- Senior Vice President, Chief Operating Officer

Hey Russell.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Hey Russell.

Russell Gunther -- D.A. Davidson -- Analyst

I was hoping to follow-up on the core margin commentary, that low 370x PPP. 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 I 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 the consensus is coming in to the quarter.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

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 5 basis points 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 rest of the year, but 374 is kind of where we came in at. I think like Chuck said, the pressure's going to be how well we do and our lenders do. Put loans on the books at a reasonable rate. And as far as glide path, I mean again I said you know basis points. I mean it's not going to be -- again, if you look at the last year Russell, we had a pretty significant contraction during Q2 and then kind of I won't 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 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 wouldn't be surprised if it was more than that, how about that?

Chuck Parcher -- Senior Vice President, Chief Lending Officer

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

Russell Gunther -- D.A. Davidson -- Analyst

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, you know I 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.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

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 PPP, as that money comes in, it rolls out and pays down our commercial lines of credit. So we are already seeing some reduction 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 longer term as I look at our pipeline, our pipeline today was bigger than it was at this time last year. So no, it's got a little bit different mix to it. I would tell you its a little bit more construction, which also means that we'll more of that growth toward the mid to back half as those things start to get built as compared to no up-front. But we still feel confident in the markets we are in. We had a great year last year, on the CCC, Great Cleveland, Greater Columbus, Greater Cincinnati where we had really nice strong loan growth across all those markets and we don't see that diminishing here, any time in the near future.

Russell Gunther -- D.A. Davidson -- Analyst

That's great, very helpful. And just one kind of follow-up, to tangent some of that. 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 initiative?

Chuck Parcher -- Senior Vice President, Chief Lending Officer

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 just by looking at a couple of numbers here, but we're probably any more -- this is shooting off the hip, about 70% metro as compared to the world.

Rich Dutton -- Senior Vice President, Chief Operating Officer

That's in terms of balance.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

It's in terms of balance. Yeah, that confirms the number of customers. Obviously the number of customers in our world legacy markets are number wise bigger, but obviously the loan volumes, the loan outstanding numbers are much bigger in the metro region.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

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 got a summary of loans by region and that 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. [Speech Overlap]

Russell Gunther -- D.A. Davidson -- Analyst

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

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Thank you.

Operator

And our next today comes from Joe Plevelich with Boenning & Scattergood. Please go ahead.

Joe Plevelich -- Boenning & Scattergood -- Analyst

Good afternoon, everyone. How is everybody?

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Good, hi Joe.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Hi Joe.

Joe Plevelich -- Boenning & Scattergood -- Analyst

A couple of quick question; one, you commented about the 60%, low 50's efficiency ratio. But I mean, with 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 killing 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 hand on the efficiency ratio here for the full year in 2021.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Well, they'll go up 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 travel and entertainment and things like that that were virtually nothing. How quickly do they return and stuff. So there is a chance, because if mortgage banking stays as strong as it was, 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 -- some of that's kind of depends on what happens with the pandemic and when things totally return to normal.

Same with, we are saving on business promo and things like that, because you know people aren't hosting events and stuff, and so there's a lot of expense savings I think that were related to the pandemic.

Joe Plevelich -- Boenning & Scattergood -- Analyst

Can you maybe talk about how -- how robust mortgage banking is? Any specific color on what the first quarter, first half might look like relative to the fourth quarter or 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 of quarters may check out.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

You know our pipeline is really good still Joe, so 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, 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, first and probably second quarter as well. After we get past that, then as you know it's a craft to see see where rates are going to go.

Joe Plevelich -- Boenning & Scattergood -- Analyst

Alright, thanks. Then the other two I had, one just on the deferrals. You talked about how there is some seasonality and what not impacting the fourth quarter flows. I mean any kind of directional thoughts on what deferrals might look like at say the end of March here and any concerns that you have seen a new surge in requests rather kind of activity there.

Paul Stark -- Chief Credit Officer

Hi, it's Paul. It's hard to tell right now; I don't anticipate any spike-up. I think we -- there's a steady process of working with customers and as things change, you know in terms of when they think revenues are going to start to return, hotels being a great example of that. Restaurants where the restrictions are eased, things like that. Then you know these guys are actually very cooperative and that's what we look for and they want to start paying us as quickly as they can, so most of our deferrals are actually just the principal type deferrals, very few P&I deferrals.

So you know I guess I would see this thing as pretty steady and some will be returned to payments and we'll probably have to defer some others. So it really gets down to what the individual business cycle is and what type of relief they need. But so far we have not seen any defaults and we have not really seen anything that we think is going to evolve into a charge off at this point. So we are encouraged by that, we are encouraged by the fact that we think unemployment is expected to improve over the next quarter or so, again, we'll take it month-to-month.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

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

Joe Plevelich -- Boenning & Scattergood -- Analyst

Great, thank you.

Operator

And the next question today comes from Bryce Rowe at Hovde. Please go ahead.

Bryce Rowe -- Hovde -- Analyst

Thanks, good afternoon.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Good afternoon, Bryce.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Hi Bryce.

Bryce Rowe -- Hovde -- Analyst

Hi, just one more question on the hotel book before I move on to another question or two. What is the weighted average LTV within that portfolio currently?

Rich Dutton -- Senior Vice President, Chief Operating Officer

You know within the -- I don't have that in front of me. We are talking about 20 loans. Typically I would give you a range, it's probably between the 58% and 65% loan to value. You know it varies based on the situation. But most of them are the major flags and as Chuck indicated really good, not only capacity, but willingness to support the loans.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

And we've taken a number of those hotel loans through that SBA 504 program. So you know that you're generally start out at like a 65% loan-to-value, no a 50% loan-to-value, because they put in -- you know they take 35% and the borrower has to put in 15%. So we've got a number of them at that level as well.

Bryce Rowe -- Hovde -- Analyst

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

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Well that's where the opportunity is, would be in that CD bucket. I think in our Alcoa working group, we identified that we may be able to get about, four or five basis points more eke 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 are 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 months special is 40 basis points, and we had a 13 months special out there or 13 month -- yes, 13 month we had 30 basis points. So 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, and as we alluded to $173 million in the business deposit growth, $85 million in personal checking accounts, and the nice thing about that is we -- some of that non-interest income growth within our Treasury Management services and that's just recurring income that we are going to get every year. So you know we have very little reliance on CDs, so -- and I think we're going to continue with the same strategy that we will 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 income.

Bryce Rowe -- Hovde -- Analyst

Got it, OK. I wanted to ask about PPP 2 here. You noted $55 million give or take of approvals so far. Just, how are you thinking about, maybe relative to PPP 1 that was $260 million give or take. Do you think that you know the PPP 2 originations will approximate half of what you did PPP 1 or could it be less than that?

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Well, I think we're probably going to be at half. If you look at even where we are at today, I think I looked at some numbers right before we came in, I think we're at about 1035 loans and PPP 1 we did 2,300, a little over 2,300. So we are getting pretty close to that half level, and we are tracking them on a fee basis and everything. So we are right about at that mark and that surprises me. I thought when this rolled out, I think Paul will echo this and Chuck echoed the same thoughts, you know that maybe we would do half of that volume. It looks like we're going to probably do maybe a little bit better than that.

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Well, the volume in number of loans, but in terms of actual outstanding the average size of the loans have dropped this round. It's part of because the SBA put restrictions on the maximum amount, and we really are trying to emphasize smaller borrowers, so plus there is 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. I would -- it started to taper off a little bit in terms of demand too. So we'll see how this all plays out, because it is definitely more slow moving than we thought it was going to be.

Bryce Rowe -- Hovde -- Analyst

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. Just -- I was wondering if you had, you know some conversations with potential partners, very informal conversations. But I think you know 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 stock valuations have gone home over the last few months.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

I think that's part of my daily chores, is to proactively reach out. I mean we've identified some potential who we think would be very good partners. I would tell you that I think that obviously people would realize the challenges that lie ahead. I think much more so today than it did even 12 months ago. Some of my conversations with some of my counterparts at 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'd still be substantial pressure on margin and I think it'll be very difficult for some of these banks to make money.

So given that, I think they realized that. So we've had some -- you know I've had some pretty decent conversations with people in regards to what the future might look like. We try to share our vision. We think, we'd be a great fit for quite a few of these community banks, very -- 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 maybe at $5 billion in assets or $6 billion or $7 billion in assets. Because I think, we'll be a little bit more sensitive to their needs, because I think it's going to work for both banks and it's going to work for the shareholders, it's going to work for the community, it's going to work for the employees, it's got to be that cultural fit and I think we'll 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.

Bryce Rowe -- Hovde -- Analyst

That's great color. Thank you. You all have a good weekend.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

You too. Thank you.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Shaffer for any final remarks.

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Thank you. In closing I just want to thank everyone for listening and thanks to all 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.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Dennis G. Shaffer -- Chief Exeuctive Officer and President

Chuck Parcher -- Senior Vice President, Chief Lending Officer

Rich Dutton -- Senior Vice President, Chief Operating Officer

Paul Stark -- Chief Credit Officer

Michael Schiavone -- KBW -- Analyst

Terry McEvoy -- Stephens -- Analyst

Nick Cucharale -- Piper Sandler -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

Joe Plevelich -- Boenning & Scattergood -- Analyst

Bryce Rowe -- Hovde -- Analyst

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