Peoples Bancorp Inc (PEBO) 2020 Q4 法說會逐字稿

Good morning and welcome to Peoples Bancorp Inc. conference call. My name is Sarah, and I will be your conference facilitator. Today's call will cover a discussion of the results of operations for the quarterly period and annual period ended December 31, 2020. (Operator Instructions) This call is also being recorded. If you object to the recording, please disconnect at this time.

Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations.

The statements in this call, which are not historical fact, are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings. These include, but are not limited to, the ever-changing effects of the COVID-19 pandemic on the economic and market conditions and on our customers, counterparties, employees and third-party service providers as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic; changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors and/or the fiscal and monetary policy measures undertaken, which may adversely impact interest rates, the interest rate yield curve, interest margin, loan demand and interest rate sensitivity; the success, impact and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the expansion of commercial and consumer lending activity in light of the continuing impact of the COVID-19 pandemic customers, operations and financial conditions. The competitive nature of the financial services industry, the impact of assumptions, estimates and inputs used within models, which may vary materially from actual outcomes, including the connection with the current expected credit loss model or CECL model; the discontinuation of the London InterBank Offered Rate, LIBOR, and other reference rates, which may result in increased expenses and litigation and adversely impact the effectiveness of hedging strategies; uncertainty regarding the nature, timing, cost and effect of federal and/or state banking insurance and tax legislative or regulatory changes or actions; and changes in accounting standards, policies estimates or procedures.

Management believes the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' business and operations. However, it is possible, actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples' fourth quarter 2020 earnings release was issued this morning and is available at peoplesbancorp.com, under Investor Relations. A reconciliation of the non-generally accepted accounting principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release.

This call will include about 30 minutes of prepared commentary, followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for 1 year.

Participants in today's call will be Chuck Sulerzyski, President and Chief Executive Officer; and Katy Bailey, Chief Financial Officer and Treasurer, and each will be available for questions following opening statements. Mr. Sulerzyski, you may begin your conference.

Thank you, Sarah. Good morning. Happy New Year, and thanks for taking the time to be with us this morning. Year 2020 ended much differently than it began. Our business, like many businesses, was heavily impacted by COVID-19 pandemic and the way in which we function and provide our services has changed dramatically over the past 12 months. For periods of time, our lobbies have been accessed by our clients as appointment only. Our meetings became virtual. A portion of our associates have been working from home and only coming into the office periodically.

While the pandemic continues to have an astonishing impact on our industry, we have been adept at modifying our practices and adopting to a new situation that arises. The Paycheck Protection Program from the Small Business Administration, for which we offered loans to small businesses, resulted in our associates working night and day to process applications. Our sales teams continue to have meaningful conversations with customers. We remain determined to deliver our high-quality services to whatever means necessary.

Earlier this morning, we reported record quarterly net income. Looking to our results, we reported diluted EPS of $1.05 in the fourth quarter compared to $0.51 in the linked quarter and $0.72 for the fourth quarter of 2019. For the full year, we reported diluted EPS of $1.73 compared to $2.63 for 2019.

During the fourth quarter, we recognized certain noncore transactions, which included severance and COVID related expenses, which negatively impacted diluted EPS by $0.03 and $0.01, respectively. Proceeds from the sale of restricted Class B Visa stock and low-income housing tax credit investments, which positively impacted EPS by $0.03 and $0.01, respectively.

For the full year of 2020, our noncore transactions included acquisition-related costs, which reduced EPS by $0.06, COVID related expenses, which decreased EPS by $0.05, severance expenses, pension settlement charges and income tax expense true-up from prior years, each of which negatively impacted EPS by $0.04 and proceeds from the sale of restricted Class B Visa stock, which positively impacted EPS by $0.03.

As it relates to our reported performance, we generated positive operating leverage for the full year of 2020 compared to 2019. This means that we grew our revenues at a faster rate than our expenses compared to the prior year. When adjusted for noncore expenses, we did not achieve positive operating leverage compared to 2019 because of the decline in net interest income due to the low rate environment. For the fourth quarter of 2020, compared to the fourth quarter of 2019, we did have positive operating leverage when adjusted for noncore expenses.

As far as our involvement in the SBA Pay Check Protection program, we received some proceeds from the payoffs of loans forgiven by the FDA during the fourth quarter. At the end of December, our PPP loan balances had declined by $94 million or 20% from September 30, 2020. During the fourth quarter, we recognized $3.7 million of interest income on the amortization of the net deferral loan fees and costs from the PPP loans. At the end of December, we had $7.9 million of remaining net deferred loan fees and costs, which will be recognized as income through the respective maturities of the loans or the forgiveness by the SBA.

We continue to have opportunities to introduce our PPP clients to our other lines of business to determine additional products and services that align with their needs. At December 31, 2020, we had new deposit accounts totaling nearly $50 million and $35 million of loans associated with these PPP clients. We have also added approximately $250,000 of annual fee income from PPP clients.

Regarding our provision for credit losses, we recognized the recovery of provision for credit losses of $7.3 million during the fourth quarter. Our provision for credit losses totaled $26.3 million for 2020. The reduction in the provision of credit losses compared to the linked quarter reflected the most recent Moody's economic forecast utilized in our CECL model at the end of December, which had improved compared to the economic forecast at the end of September.

Compared to the economic forecast from September, the December forecast for the next 4 quarters included an improvement of approximately 2% in U.S. unemployment, approximately 4% in Ohio unemployment and approximately 3% in Ohio GDP. Meanwhile, compared to the full year of 2019, our provision for credit losses increased significantly. This increase reflected the utilization of the CECL model, which is driven by forward-looking expected losses and largely based on economic forecasts for Moody's that deteriorated due to the pandemic.

During the first half of 2020. During the first half of 2020, the increase in allowance for credit losses has been driven by economic forecast for Moody's that showed high rates of unemployment, which improved in the latter half of the year. To the extent economic factors from Moody's continue to improve, which include unemployment and GDP rates and the credit quality metrics remain strong, we would anticipate having additional releases of provision in future periods.

Regarding loan modifications, at the end of December, the balance of loans on COVID-related modifications totaled $22 million, representing less than 3/4 of 1% of our outstanding loan balances. Last quarter, we mentioned that the level of modifications would increase compared to September as we were processing additional request for payment relief at that time. The breakdown of the outstanding loans on payment deferral plans as of December 31, 2020, include $5 million in consumer loans and $17 million in commercial loans.

At this point, the vast majority of our COVID-related deferrals are paying on time. Of the commercial loans under an active payment relief plan, almost 2/3 were with customers operating in the lodging sector. The other borrowers with active loan modifications operate in industries of transportation, childcare, amusement and recreation and restaurants and breweries. While we are processing additional requests for payment relief, we expect the aggregate COVID-related loan modifications to increase slightly at the end of the first quarter to comprise around 1% to 2% of outstanding loan balances. The anticipated increase is being driven by additional relief in the lodging and commercial real estate portfolios, primarily relating to three clients.

The lodging industry has been heavily impacted by the pandemic, resulted in clients requesting additional deferments for more than 6 months. Our total expenses -- our total exposure to the lodging industry was $81.7 million at the end of December, which excludes $2 million of PPP loans. To date, we have provided payment relief to 80% of our lodging portfolio, but only 2 customers remain on active deferment. Given the stress in the industry, we anticipate additional clients will seek payment relief in the coming quarter.

This portfolio consists primarily of 13 properties with an average loan-to-value of 64%. 10 of these properties are flagged, meaning they are part of a national franchise. 2 of the properties that are not flagged consist of Cabin rentals, which have performed relatively well during the past 8 months. The guarantor of liquidity is strong on half of the properties within the lodging portfolio.

Additionally, the top 3 relationships within the portfolio account for 69% of the total exposure. These relationships are also supported by guarantors [range] and by an SBA guarantee. Approximately $10 million of the exposure under these relationships remains advanced as the project is on hold due to COVID.

We have one criticized relationship in one classified relationship in this portfolio, which were performing at a satisfactory level prior to COVID. These 2 relationships account for an aggregate of $10.7 million or 13% of the lodging portfolio, excluding PPP loans. The pandemic as further stressed overall cash flow of these specific operators, which led to the downgrade.

We do not anticipate any losses on our lodging portfolio through the first half of 2021. Given the extension on TDR relief, we will work with our borrowers as much as possible to stabilize occupancy and cash flows return. Excluding $55 million of PPP loans, our exposure to restaurants was $171 million at December 31, 2020, which included $137 million to McDonald's franchisees.

Excluding PPP loans, our loans to operators of non-McDonald's franchise restaurants accounted for $34 million of our total restaurant portfolio exposure at December 31, 2020. In total, this portfolio accounted for $8 million of the $114 million in total deferments to restaurant operators that we have provided during the pandemic. The non-McDonald's franchise restaurants include $5 million in loans with a government guarantee enhancement. These specific clients benefited from the CARES Act as funding was used to support the customer principal and interest payments for an aggregate of 6 months during the year.

We provided over $27 million in PPP loans to these non-McDonald's franchise restaurants. At December 31, 2020, we had 2 loans remaining on active deferment with $1.5 million in outstanding balances. With the passage of the Consolidated Appropriations Act of 2021, eligible borrowers under the SBA loans will receive an additional 3 months of funding for loan payments, beginning with their February 2021 payment. High-impact industries, such as restaurants, will be eligible for an additional 5 months after the 3 month payment period ends.

While we have anticipated an increase in our delinquencies related to the pandemic, we continue to see a stabilized delinquency rate. At the end of December, 98.9% of our total loan portfolio was considered current compared to 98.6% at December 31, 2019. During the fourth quarter, we also saw improvements of our nonperforming assets, which declined $1.5 million from the end of September. Our quarterly annualized net charge-off rate was 10 basis points compared to 8 basis points for the linked quarter and 16 basis points for the fourth quarter of 2019.

We recognized a $508,000 recovery on a previous charge-off commercial relationship during the fourth quarter of 2020. Our net charge-off rate for the full year of 2020 was 5 basis points compared to 4 basis points for 2019. Compared to the end of September, our classified loans declined $3.5 million. This decline was driven by the upgrade of 3 commercial relationships totaling $5.4 million, coupled with the payoff and amortization of other classified loans. This improvement was partially offset by the downgrade of one commercial relationship with an aggregate balance of $4.5 million that was downgraded, special mention, to substand it during the quarter. Our criticized loans increased $3.4 million, which was mostly due to the downgrade of 2 larger commercial relationships totaling $8 million.

These downgrades were partially offset by payoffs of amortization of other criticized loans during the quarter. All of the downgraded relationships I mentioned were COVID-related. Our total COVID-related downgrades that occurred during the quarter were $12.4 million. As it relates to our loan portfolio, our loan balances declined 2% from September 30, 2020. This decline was related entirely to the beginners of our PPP loans, which were down 20%. The this was partially offset by higher commercial real estate loans, which grew 7% annualized and our premium finance loans, which were up 41% annualized compared to the linked quarter end.

Excluding PPP loans, our loan growth was 3% annualized compared to the end of September. As we expected, our consumer indirect loans grew at a slower pace during the fourth quarter than in prior quarters, which was impacted by seasonality. From a commercial loan perspective, 2020 was one of our best production years. However, this growth was muted by our clients' low utilization rate of commercial lines of credit, which resulted in $68 million decline in commercial line of credit balances compared to December 31, 2019.

At December 31, 2020, our clients' commercial line of credit utilization rate was 39% compared to 55.2% at the end of 2019. At the same time, we grew our commitment on the commercial lines of credit by over $100 million from December 31, 2019. We are currently participating in the latest round of PPP. As of Friday, we have over 500 applications for over $80 million in potential loans. Our participation in the program has allowed us to grow our loan balances and future income related to fees, which have been beneficial as the loans are forgiven.

I will now turn the call over to Katie for additional details about our financial performance.

Thank you, Chuck. Our results for the quarter improved as the benefit of the recovery of provision for credit losses impacted many of our performance metrics. Our quarterly return on average assets and return on average stockholders' equity both improved, and were higher than the linked quarter and prior year quarter. Compared to 2019, these annual ratios declined, mostly due to the provisions for credit losses recorded during the first half of 2020.

Our pretax pre-provision ROA increased from the linked quarter. Compared to the prior year quarter and full year of 2019, this ratio declined. The decreases were driven by the sustained impact of the low interest rate environment on our net interest income during 2020. The reported efficiency ratio improved compared to the linked quarter, but was higher than the prior year quarter. The reported efficiency ratio also improved compared to the full year of 2019. The increase compared to the prior year quarter was largely due to a decline in net interest income, along with increased data processing and software costs and higher FDIC insurance expense.

The increase in FDIC insurance expense reflected the fact that credits had been received during 2019, which continued into early 2020 and then ran out. The impact of the PPP loan balances on our leverage ratio also increased our FDIC assessments during 2020. While we can reduce our FDIC assessment for the PPP loans by pledging them to the PPP lending facility, we have chosen not to utilize this type of funding source as we have other lower-cost funding available.

The adjusted efficiency ratio, which excludes noncore expenses, declined compared to the linked quarter and prior year quarter. These improvements were driven by lower core noninterest expense compared to prior periods. The adjusted efficiency ratio increased for the full year of 2020 compared to 2019, which was mostly due to the decline in net interest income compared to the prior year. Net interest income decreased 2% compared to the linked quarter and prior year quarter. Net interest margin was stable compared to the linked quarter, but declined 43 basis points compared to the prior year quarter.

Compared to the linked quarter, we had additional fee income of $1.8 million recognized related to the PPP loans that were forgiven during the quarter. This benefited our commercial loan yields, which were up 81 basis points from the linked quarter. The reduction in our net interest margin compared to the prior year quarter was mostly due to an increase in amortization within our investment securities portfolio. This was driven by prepayments, along with the decline in accretion income, net of amortization expense from acquisitions.

During the fourth quarter, we took action to reduce our exposure to the increased prepayment speed. As a result, we sold several investment securities to mitigate future high premium amortization, which resulted in a net loss of $751,000 on investment securities recorded during the quarter. October and November prepayment fees on investment securities continued to increase relative to prior months, while December slowed somewhat compared to prior months.

For the fourth quarter of 2020, we had premium amortization of $4.9 million compared to $4.6 million for the linked quarter and $3.4 million for the prior year quarter. Compared to the full year of 2019, net interest income decreased $1.9 million or 1%, which reflected the repricing of most of our variable rate loans within the portfolio. This decline included the $10.7 million benefit from the income recorded on the PPP loans originated during 2020.

Compared to 2019, we have cut our interest expense by 38%, as we have been proactive in reducing our deposit pricing while monitoring our borrowing costs. At the same time, net interest margin declined 45 basis points as loan yields have been impacted by the low rate environment, while investment yields have declined due to prepayments.

For 2020, PPP loans added $10.7 million of net interest income and 2 basis points to net interest margin. At the same time, premium finance loans added $2.9 million to net interest income and 2 basis points to net interest margin. We continue to closely watch our deposit costs, which were 29 basis points for the fourth quarter compared to 66 basis points for the prior year quarter.

Accretion income, net of amortization expense, declined during the quarter to $207,000, and totaled $2.8 million for the full year. Our accretion income has been impacted by residential real estate loan portfolios we have been purchasing, for which we have been paying a premium and are now seeing some of those loans pay off in recent months.

Accretion income added 2 basis points to net interest margin for the quarter and 7 basis points for the full year of 2020. Fee-based income, which is noninterest income, excluding gains and losses, grew 3% compared to the linked quarter and was flat compared to the prior year quarter. The growth compared to the linked quarter was mostly due to the sale of restricted Class B Visa stock, which resulted in $680,000 of other income. We also had proceeds from low-income housing tax credit investments of $334,000 in the fourth quarter of 2020.

Compared to the linked quarter, we had growth in swap fee income, trust and investment income and deposit account service charges, which were more than offset by lower mortgage banking and insurance income. The decline in insurance income reflected the impact of the additional $591,000 of insurance income recorded during the third quarter due to the timing of the recognition of revenue related to contracts.

Compared to the fourth quarter of 2019, our fee-based income experienced growth provided by mortgage banking and trust and investment income. This was coupled with the restricted Class B Visa stock sale, improving other noninterest income. Nearly offsetting these improvements were declines in all other categories, many of which were a result of the pandemic. Compared to the full year of 2019, fee-based income decreased 1%. We had significant growth in mortgage banking income, which was up 50% compared to the prior year due to the low interest rate environment. We also had increases in electronic banking and trust and investment income compared to 2019.

More than offsetting these increases were reductions in deposit account service charges, which were heavily impacted by the pandemic, PPP proceeds and fiscal stimulus as -- along with lower insurance, swap fee and bank-owned life insurance income. The higher bank-owned life insurance income during 2019 was due to $482,000 of death benefit proceeds received during that year.

Fee-based income improved to 34% of total revenue for the fourth quarter compared to 32% for the linked quarter and 33% for the prior year quarter. Compared to 2019, fee-based income was stable at 32% of total revenue for both periods. Total noninterest expense declined 3% compared to the linked quarter and was down 1% compared to the prior year quarter. We incurred severance expenses of $771,000 in the fourth quarter, which, as we mentioned last quarter, will give us some cost savings going forward. Contributing to the reduction from the linked quarter were declines in salaries and employee benefit costs, net occupancy and equipment and electronic banking expense.

Compared to the prior year quarter, our total noninterest expense was impacted by lower other noninterest expense, which was driven by decreases in travel and entertainment expense and supplies. We also had declines in other loan expenses, professional fees and net occupancy and equipment expense. These declines were partially offset by higher FDIC insurance expense, which was impacted by credits that had been utilized during 2019 and were fully used by early 2020.

Compared to the prior year quarter, we also had increased data processing and software expense. These additional costs were related to the implementation of new software, along with an increase in our core processing costs. Total noninterest expense declined 3% compared to the full year of 2019. This was mostly due to the noncore expenses recorded during 2019, related to the acquisition of First Prestonsburg. The reduction in acquisition-related expenses in 2020 was, however, partially offset by an increase in other noncore expenses recorded during 2020.

Excluding noncore expenses, total noninterest expense was relatively flat compared to 2019. Core deposits, which excludes CD balances, grew 2% compared to the linked quarter end. We continue to see increases in savings, interest bearing demand, noninterest-bearing demand and money market accounts. This growth has been beneficial as these are relative -- these are all relatively low-cost deposit sources. Our deposit balances continue to be impacted by the pandemic as our clients are maintaining higher than normal balances. Demand deposits grew to 43% of total deposits at quarter end, an increase from 42% at September 30, 2020, and 40% at December 31, 2019.

During the fourth quarter, we repurchased another $4.3 million of shares as our stock price remains relatively low. We continue to maintain capital levels that are above well capitalized and believe in strong returns for our shareholders. While we have made nearly $30 million in share repurchases this year, we are prudent in our approach and will not sacrifice the strength of our capital position to continue buying shares. As far as any future repurchase plans, we are closely monitoring and stressing our capital levels, as we have done previously, to determine the most appropriate action.

As it relates to CECL, our allowance for credit losses stood at 1.48% of total loans at December 31, 2020. This is a reduction, compared to 1.67% at September 30, as the economic forecast had improved. Our allowance for credit losses declined 13% compared to the linked quarter end. Our allowance for credit losses as a percent of total loans was negatively impacted by 18 basis points at December 31, 2020, due to the PPP loans, for which no allowance for credit losses is recorded as a result of the full guarantee by the SBA.

Our allowance for credit losses as a percent of loans doubled compared to December 31, 2019, as we implemented the CECL model during 2020, coupled with the impact of the pandemic on the underlying assumptions.

I will now turn the call back to Chuck for his final comments.

Thanks, Katie. Our growth highlights from 2020 include loan growth of 18% compared to December 31, 2019, which was mostly due to our participation in the PPP as well as our premium finance acquisition. We had significant growth in our low-cost core deposits, which were up 27% compared at the end of 2019.

We cut our deposit cost in half of 2020 to 36 basis points compared to full year of 2019. Our tangible book value per share increased to $19.99 at December 31, 2020, compared to $19.34 at December 30, 2020. Our core noninterest expense was down 3% compared to both the linked quarter and the prior year quarter and was flat for 2020 compared to the full year of 2019.

Our fourth quarter of 2020 was the best quarter of the year for pretax pre-provision net revenue. Our ending household count for 2020 increased compared to the end of 2019. And our credit quality metrics remained stable, and our delinquency rate improved compared to the end of 2019.

Looking forward to 2021, we typically have higher expenses during the first quarter of each year. We just want to remind everyone that this is usual and expected as we recognize additional costs related to employee contributions to health savings accounts, stock-based compensation expense for certain employees, higher payroll taxes and annual merit increases.

As I mentioned during the last quarterly call, we are expecting low single-digit loan growth for 2021. Currently, our first quarter numbers for loan growth are looking strong. Our loan growth in future periods will be contingent upon continued economic improvement. We have been happy to have made a positive impact on all communities during the pandemic. Our foundation gave out $750,000, which was a record to local communities. In addition, our associates donated $116,000, to support food banks within our footprint to assist in hunger prevention.

This concludes our commentary, and we will open -- and we will open the call for questions. Once again, this is Chuck Sulerzyski. And joining me for the Q&A session is Katie Bailey, our Chief Financial Officer. I will now turn the call back into the hands of our call facilitator. Thank you.

(Operator Instructions) Our first question will come from Scott Siefers with Piper Sandler.

I guess the first question is just on PPP and how you would see the forgiveness trending from here. And is that -- and Chuck, you have the low single-digit loan growth expectation. Maybe if you can just remind us or clarify, does that include or exclude what happens with PPP forgiveness, please?

Yes. It excludes PPP. So we had about 20%, 21% of the PPP forgiven by December 31. I think we're sitting here right now, it's about 31% forgiven. I think, of the first batch, which I think, for us, was like $480-odd million, I think we will get most of that in the first and second quarter of this year. As for the new PPP program, it's hard to say what the forgiveness timing on that will be, but hopefully, in this calendar year.

Okay. Perfect. And then just to be clear, Katie, in the -- when you talk about the $3.7 million of income on deferred loan fees and costs, just so I'm clear, since there's a lot of different descriptions of the PPP fees that go around, that's the -- that $3.7 million, that's the accelerated fee -- accelerated origination fee recognition. Is that correct?

Most of it, yes. The rest is just the piece that we're amortizing over the roughly 2 years.

Our next question comes from Michael Perito with KBW.

Chuck, Katy. I had a couple of questions I was hoping to address. Chuck, I wanted to start on the credit and a little bit more of a big picture question for you than anything specific to PEBO. But as we think about the year, it was pretty wild, right? I mean, you guys, sitting here today, the reserve's double what it was coming out of 2019, yet your nonperformers are basically flat, your charge-offs are flat and obviously, your deferrals are almost nothing. And it's hard to imagine that, that's the case, but -- given all the uncertainty throughout the year. But I guess, where do we go from here, do you think, Chuck? I mean, obviously, this was going to be a little bit of a hard year with CECL adoption, even ex the pandemic from a modeling perspective. But any kind of general thoughts on how you view the reserve for your loan portfolio in a CECL environment going forward (inaudible).

Yes. So if you go back and look at what we did with CECL. And if you look at the adjustment we made in January, I think that reflected our belief in what we thought was in the in the total portfolio. So I mean I think there's tens of millions of dollars of extra reserves in there, which is, I guess, a way to say, "I have a lot of faith in the portfolio. And I don't think we're going to see the charge offs."

As I understand, it's over the life of the loan as opposed to in a specific year. But I am very optimistic. Bringing money back into income is dependent on the Moody's economic forecast more so than anything else. So, yes, I'll leave it to the economists to predict what's going to happen. But as far as the portfolio, I'm very, very happy. I love the fact that it's very diversified. And I'm not saying it's perfect, but I'm saying that we have a lot of pride in it.

Is it fair -- that's helpful, Chuck. Is it fair to -- I mean, if I look back, I mean, you guys were running just maybe at or just under 80 basis points for the few years heading into the pandemic. I mean is it still a fair assumption to think that under CECL, that number, if we ever get back to that type of steady state benign environment, would it still kind of structurally be higher than what it was under the old methodology? Or is that not necessarily the case?

No, it should be higher than it was under the old methodology. It should force banks to keep more in reserves.

And Mike, I would just remind you that the pre-CECL, the number, I believe, you quoted, would have excluded those loans that we have acquired through acquisition, and we would have probably be closer to the 1% if you had included those loans.

True. That's helpful. And then I wanted to ask about positive operating leverage for 2021. Chuck, any high-level thoughts about kind of what the hope is you guys can do there? And I guess, is it fair to think that as long as rates are near 0, holding the efficiency ratio flattish here in 2021 would be a win? And then obviously, if rates move higher, there would be leverage on top of that?

Holding the efficiency rate flat would be, I think, a huge win for any bank in this environment. We have -- I was happy to see the fourth quarter results with the positive operating leverage relative to the linked quarter and the prior year quarter. We continue -- we made some announcements last quarter about efficiencies, and we continue to look internally for efficiencies. Certainly, some loan growth would help us. I think we're going to need some of that help to get to positive operating leverage.

Okay. And then just lastly, do you mind updating us on the capital priorities for 2021? I mean, it seems like there's quite a bit of room for further bank consolidation. Certainly, in the Ohio geography, it looks like there's quite a bit of room. Just any updated thoughts there? And then could you remind us to what your appetite is outside of kind of full bank, whether it's more kind of specialty niche lending, team lift-outs or fee acquisitions? Just any update there would be helpful.

Well, we remain optimistic on acquisitions. We would like to buy banks in the footprint and even some contiguous. We'd love to buy a leasing company. We've been pretty consistent on that for a period of time. We have not done team lift-outs I've always had a philosophical issue with team lift-outs. Somehow I don't want the bottom half of the teams. If I can get the top half of the teams, I'd like it, but that may be more my problem.

And if there is opportunity for us to do something like that, potentially, in a number of towns, we would consider it. As far as the capital, we remain committed to the dividend, and I hope to be able to increase the dividend in the future.

And as it relates to stock buybacks, we bought back shares every quarter in 2020. Yes, I think we're one of the few banks who can say that and increase the dividend in the same year. But we look at the buyback as we look at acquisitions and we look at the earn back on that. And I think that we'll see less buyback activity in '21 than we did in '20. So you can go back to rating me for not buying shares at higher prices.

No. I mean, hopefully, right, I mean, there's, I think, 2020, and I think you're probably -- so I can't really think of any other bank off the top of my head that [pulled back on all 4] and raised the dividend in this year. But certainly was a year where a little bit more internally focused. I mean, it sounds like moving into next year, your hope would be that capital would be more for external growth opportunities, whether that be loan growth or M&A or leasing acquisitions or whatever the opportunities that come your way. I mean, is that -- it seems like the environment will be more accommodating to those aspirations. Is that fair?

That's fair.

Our next question comes from Steve Moss with B. Riley Securities.

This is Gates Schwarzmann. I'm Steve's associate. I'm just going to sit in and ask questions on his behalf today. So my first question here is how should we approach anticipating the size and the yield on the security book going forward? Any sort of color on loan pricing would be appreciated.

So on the investment portfolio, I think it was lower at year-end. We would look to put some of the excess liquidity to work in the first part of the year. So I think that was the first part of your question. I think you can expect some increase in the investment securities as a relative size goes.

And in terms of loan yields, it's competitive. We hope to see a little bit of expansion, but I'm not super optimistic.

Okay. Got you. Yes, that's super helpful. And also, on fee income, I'm seeing that insurance is down year-over-year. I'm sort of curious, what are the drivers looking like there? And what are you guys seeing in the market?

Well, first off, I think you'll see insurance income go up this year. I think the market has significantly hardened. We had some issues with account retention last year that we hope not to experience again. And there wasn't quite the premium increases that we had hoped for. So -- but we -- I think you'll see solid low to mid-single-digit growth there this year.

Awesome. And last question. Where should we sort of try to project you guys out in terms of tax for 2021? What are you guys thinking in terms of tax?

Yes. I think in the 19.5% ranges, thereabouts is probably a good starting point?

You tell us what our friends in Washington are going to do.

Yes, that's assuming no tax law change, of course, but...

Our next question comes from Russell Gunther with D.A. Davidson.

I appreciate all of the color in terms of the dynamics for the net interest margin in the quarter. I was hoping you could share your thoughts on where you'd expect the core margin to be for 2021, maybe parsing out purchase accounting accretion and PPP fees.

Yes. I think we would expect to get back to the third quarter level over the course of the next 2 quarters, which was in the roughly 3.10% range. But again, it will take a quarter or 2 to get back there. And again, that's assuming some speeds on the investment portfolio don't continue to get faster. We kind of see the December trend continue as opposed to the October/November trend.

Okay. Got it. I appreciate that. And then kind of within that 3.10% core range. What do you guys expect for the premium finance yield going forward?

Yes. The yield on the premium finance will run somewhere around 6%, maybe a shy short of the 6% range.

Okay. Great. And then switching gears to the organic growth guide you gave, low single digits. I know premium finance is an area that you'd expect to continue to grow. But any other thoughts on the mix in terms of continued organic growth into '21?

Our indirect business has been going strong and continues to go strong. I think you'll see some good growth there. As we stated in the script, the production in commercial last year was extraordinary. We just were going against the lower line utilization.

We're very optimistic on the first quarter. And that first quarter optimism is based on what we hope to see in commercial. So we'll reassess -- I got to be careful here because we're not giving guidance at this time, but we'll reassess where we are at the end of the first quarter. And hopefully, we can be a little bit more optimistic on loan growth.

(Operator Instructions) Our next question comes from [Jordan Lavin with Winner Industries].

This is [Jay Searson for Jordan]. We asked to get a copy of your company's culture books, and you are very kind to send us -- send that along to us as well as a very nice hand-written note, so thank you for that.

In the book, in the competency model section. You present a lot of things that you want your people, all of your people, this wasn't the executive section. You present a lot of things you want them to be able to do and some of those things seem really hard. For example, "makes good decisions regardless of how much time it takes." I can't do that. "Can anticipate future consequences and trends accurately." That's hard. And, "Quickly grasp the essence and underlying structure of anything." I'm not sure anyone on Earth can do that. So my question is, to what extent is this section aspirational? And to what extent do you actually expect this of all your 500 employees?

Well, it's aspirational. If you put it in sports terms, I was a pretty crappy college basketball player. And you try to shoot, pass, dribble, rebound and defend. And if everybody is a 5 out of 5-point scale and all of those, they're going to be the Michael Jordans and the LeBron James. Our company is based on the belief that all of us try to be better next quarter than we were this quarter. And it's in that spirit that, that's given as a picture of where people can aspire to get to.

The rest of the book, is that also aspirational? Or is it more like this is what we expect on a day-to-day?

It's a combination of different things. If you had the opportunity to go through it. We talk about missions and values. We talk about how we want to treat one another. We talked about what the keys to our success on, and that's kind of what we try to do. So I don't know if there's something specific in there that you want to talk about.

Our next question is a follow-up from Scott Siefers with Piper Sandler.

Chuck, just curious to the extent you're comfortable offering it, maybe thoughts on where you would see net charge-offs for the full year. It's been just such an enormous rollercoaster ride over the past several months from -- so kind of nightmarish in the spring and summer to now what looks very, very benign. Do you think you could keep charge-offs flat year-over-year in '21? Or how are you thinking about that dynamic?

And then additionally, what's your best guess as to when we would see a little more loss emergence?

Well, I think loss emergence may be pushed out further if there's another round of stimulus. So we've got to keep that in mind. I think that -- I don't think we'll see any more charge-offs in the first half of this year than we have in the first half of '21 on average than we saw in full year 2020.

As far as the second half of the year, I think a lot of that depends on the vaccination and the progress, but I'm optimistic. The regulators, I think, have been very prudent in allowing us to not muck everything to TDR hell and back. And so I think if the regulatory environment stays the same, if we begin to get things under control with vaccinations, then I'm optimistic that it won't be much worse than this year. I mean, do I think that -- I think, personally, I think all of these last 10 years that we've all enjoyed with virtually no charge-offs, that's not consistent with the prior 30 years of my career. So I think we've been living in a little bit of nirvana. So I wouldn't be surprised to see charge-offs return to what I would think of as more normal in the 20 to 30 basis points range. But I don't think you'll see that in the first half of the year. And I might say, you'll see it in the second half of the year. I'm just saying I don't have a lot of visibility.

Our next question comes from Joe Plevelich with Boenning.

Quick clarification question on the loan growth guidance for 2021, that is on an ex-PPP basis, correct?

Yes, sir.

Okay. And the second round of PPP, you mentioned $80 million of apps so far. You did over $450 million for the first round. Where do you think the second round shakes out?

It's just a just a wild-ass guess. We have no way of knowing, but I'd say somewhere between $200 million and $250 million. You got to remember that people could only get $2 million as a max. Last time, it was 10. They have to have a quarter where they've had a loss. There's a couple more constraints, so down 25%. There's a couple of more constraints that weren't in place last time. So it'll be less for sure.

Got it. And then you hinted that we could see some further reserve releases here. I'm not sure if that's going to be the first half or second half of this year, allowance to loans 1.48%. Where do you see the allowance to loans, say, at the end of 2021 or even longer-term in this kind of new world with CECL, et cetera?

Well, you tell me what the Moody's economic forecast will be. And I'll tell you what the reserves will be. I don't know what it gets down to it, but I think it can go lower than what it is, I guess, is what I would say. It's -- I think it'd be easier. I hope -- I'm anxious to see all banks adopt CECL, so we can get better comparative numbers, but we feel pretty good about where we are.

And the only thing I would add there, Joe, is just the factor of the PPP loans into that, the ratio that you're describing and the fact that they're reducing that ratio today by nature of not having an associated reserve on them.

Yes. And my question more is when we get through all the PPP noise, is 1.50% the right number? Is 1.25% the right number? Any thoughts, I guess?

Yes. I mean, I'll put it this way, I think you have it bracketed pretty well. I don't think 1.50% is the right number, but it's probably a little bit lower, but we'll see.

At this time, there are no further questions. Sir, do you have any closing remarks?

Yes. I want to thank everyone for participating. Please remember that our earnings release and a webcast of this call will be archived at peoplesbancorp.com, under the Investor Relations section. Again, I want to wish everyone good health. Thank you for your time, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.