WesBanco Inc (WSBC) 2021 Q4 法說會逐字稿

Good morning, and welcome to the WesBanco Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to John Iannone, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to WesBanco, Inc.'s Fourth Quarter 2021 Earnings Conference Call. Leading the call today are Todd Clossin, President and Chief Executive Officer; and Dan Weiss, Executive Vice President and Chief Financial Officer.

Today's call, an archive of which will be available on our website for 1 year, contains forward-looking information. Cautionary statements about this information and reconciliations of non-GAAP measures are included in our earnings-related materials issued yesterday afternoon as well as our other SEC filings and investor materials. These materials are available on the Investor Relations section of our website, wesbanco.com. All statements speak only as of January 26, 2022, and WesBanco undertakes no obligation to update them.

I will now turn the call over to Todd. Todd?

Thank you, John. Good morning, everyone. On today's call, we'll review our results for the fourth quarter of 2021 and provide an update on our operations and 2022 outlook. Key takeaways from the call today are WesBanco remains a well-capitalized financial institution with solid liquidity, strong balance sheet and solid credit quality. We're committed to expense management while continuing to make appropriate investments, including strategic hires across our organization and markets, to enhance our ability to leverage growth opportunities. And we remain well positioned for continued success and are excited about our growth opportunities for the upcoming year.

WesBanco had another successful year during 2021 as we remained focused on ensuring a strong organization for our shareholders and continued to appropriately return capital to them through both long-term sustainable earnings growth and effective capital management. Through the successful execution of our well-defined strategies, we generated solid annual net income as well as pretax pre-provision earnings while remaining a well-capitalized financial institution with a strong balance sheet and solid credit quality.

For the quarter ending December 30, 2021, we reported net income available to common shareholders of $51.8 million and diluted earnings per share of $0.82, when excluding merger and restructuring charges. On the same basis for the full year, we reported a net income available to common shareholders of $237.4 million and diluted earnings per share of $3.62 and strong returns on average assets and average tangible equity of 1.4% and 15.22%, respectively. Further, reflecting our strong legacy of credit and risk management, our key credit quality ratios remained at low levels, and our regulatory capital ratios remained well above the applicable well-capitalized standards as well as remaining comparable or favorable to peer bank averages.

Throughout 2021, we accomplished several milestones and continued to receive numerous national accolades that resulted from our strong performance, operational strengths and community focus. I'd be remiss if I did not congratulate our employees for these recognitions as they are a testament to their hard work and dedication.

Just to highlight a few, WesBanco remains a leader in and an advocate for its communities. We continually look for ways to expand our outreach and involvement. In addition to our existing women's symposium events, we launched a diversity, equity and inclusion council that is focused on 3 key initiatives: leadership development, employee education and community development.

Through the extraordinary efforts of hundreds of employees, we completed the conversion of our core banking software system to FIS's IBS platform, which positions us well from a technology perspective. WesBanco Bank, once again, was named to Forbes Magazine's 2021 list of the best banks in America, coming in as the country's 12th Best Bank. Our Community Development Corporation was nationally recognized by the American Bankers Association Foundation for its commitment to our communities through our New Markets Loan and other programs.

For the third year in a row, we were named one of the world's best banks, which was based upon customer satisfaction and consumer feedback, as we received very high scores for satisfaction, customer service, financial advice and digital services. We were again named to Newsweek Magazine's second annual ranking of America's Best Banks, which recognizes those banks that best serve their customers' needs. Our focus firmly remains on organic growth and the potential within our markets. However, total loan growth continues to be heavily influenced by commercial real estate payoffs, commercial line of credit utilization and SBA PPP loan forgiveness.

Despite these headwinds, we'll continue to adhere to our credit strategy and make prudent long-term decisions for our shareholders and will not buy loan portfolios or syndications in order to show loan growth as the long-term credit strategic risks from such a strategy are significant.

Reflecting the still significant amount of excess liquidity across our local economies, combined with supply chain and labor constraints, commercial [line of] credit utilization of approximately 35% remains below the historical mid- to upper 40% range.

Despite continuing to experience high commercial real estate project payoffs via an aggressive secondary market, we have begun to see a decline in the amount of projects leaving. While a significant decline from the record $265 million recorded during the third quarter, payoffs for the fourth quarter totaled $160 million, which was still about $75 million above our historical quarterly range.

In fact, when adjusting for the outsized fourth quarter payoffs, total sequential loan growth would have been flat.

Furthermore, we still anticipate commercial real estate payoffs to decline through the next quarter or 2 towards our historical $85 million quarterly range.

Reflecting the strong performance of our residential lending group, we generated a record $1.4 billion worth of mortgage originations during 2021. Further, as we executed on our plans to keep more of these loans on our balance sheet, we realized nice sequential growth in residential loans of 4% non-annualized during the fourth quarter. While down from the record level in 2021, we currently anticipate residential lending to remain relatively strong in 2022 and we'll continue to retain more of the originations on our balance sheet.

During 2021, we also generated $1.8 billion in new commercial loan production with roughly 30% of that occurring during the fourth quarter. Our year-end commercial pipeline stood approximately $580 million with our Mid-Atlantic and Kentucky markets representing about 35% of that figure. Further, through the first half of January, the commercial pipeline has remained strong and increased to about $700 million.

While not relaxing our strong credit underwriting standards, we are currently refining initiatives to help retain certain commercial real estate loans instead of letting them head to the still aggressive secondary market. For our strongest customers, we are looking to provide bridge financing options that would allow us to keep these high-quality projects on our balance sheet for an additional few years as opposed to them being refinanced in the secondary market. While we are not immune from the general staffing and inflationary pressures affecting our industry and overall economy, we remain committed to expense management. Reflecting the adoption of our digital services by our customers, we consolidated 28 of our financial centers into others nearby during the last 12 months, and we continue to regularly review our footprint for additional opportunities for optimization. Moreover, we are focused on controlling discretionary costs while actively encouraging our revenue producers to pursue new business.

As I mentioned last quarter, a key investment we are making is the investment in our employees as they are critical to our long-term growth and success. The raise in the hourly wage that we implemented has already helped to improve retention as well as provide a boost in morale. Furthermore, we continue to push forward on our plans for strategic hires to enhance our ability to leverage growth opportunities once they fully return.

During 2021, we made more than 45 revenue-producing hires within our key markets in commercial lending, residential lending, wealth management, including trust, insurance, securities and brokerage. We're making steady progress in our plan to hire an additional 20 commercial lenders, whether individuals or teams, over the next 12 to 18 months. As a reminder, this plan is focused on both our existing metro markets and potential new metro markets adjacent to our existing franchise footprint. We have engaged recruiting firms in each of our metro areas as well as Cleveland, Indianapolis, and Nashville and are encouraged by their efforts to date. We have solidified our evolution into a strong regional financial services institution and believe that our distinct growth strategies and unique long-term advantages combined with our experienced teams, hiring plans make us well positioned to take advantage of future growth opportunities, while we remain well positioned for continued success. We'll continue to make appropriate investments to further enhance our position and we're excited about our growth opportunities for the upcoming year.

I would now like to turn the call over to Dan Weiss, our CFO, for an update on our fourth quarter financial results and current outlook for 2022. Dan?

Thanks, Todd, and good morning. During the year, we recognized record trust assets, record mortgage production and record demand deposit levels while maintaining our disciplined expense management posture. We continued to make important growth-oriented investments and experienced improvements in the CECL reserve for both macroeconomic forecast and qualitative adjustments.

While the continued low interest rate environment and excess liquidity negatively impacted our margin, we are optimistic about the future direction of rates and loan growth opportunities ahead.

As noted in yesterday's earnings release, we reported improved GAAP net income available to common shareholders of $51.6 million and earnings per diluted share of $0.82 for the fourth quarter of 2021. Excluding restructuring and merger-related charges, results were also $0.82 per share for the quarter as compared to $0.76 last year.

For the 12 months ended December 31, 2021, we reported GAAP net income available to common shareholders of $232.1 million and earnings per diluted share of $3.53. Excluding restructuring and merger-related charges, results were $237.4 million or $3.62 per share for the current year-to-date period as compared to $127.1 million or $1.88 per share last year.

Total assets of $16.9 billion as of December 31, 2021, included total portfolio loans of $9.7 billion and total securities of $4.0 billion. Total securities increased 48.1% year-over-year due mainly to excess liquidity related to higher customer cash balances from various government stimulus programs and higher personal savings.

Loan balances for the fourth quarter of 2021 reflected the continuation of both PPP, loan forgiveness and elevated commercial real estate payoffs. PPP loan balances in the fourth quarter declined $109 million with just under $163 million remaining, and we recognized $4.3 million in accretion for the quarter with $6.1 million of accretion remaining.

Commercial real estate payoffs during the fourth quarter totaled $160 million, which remained above our historical average of $85 million. However, payoffs did decline as expected from the approximate $260 million recorded during the third quarter. This higher level of payoffs as compared to our historical average negatively impacted total loan growth by approximately 1 percentage point.

When excluding PPP loans, total portfolio loans decreased 4.9% year-over-year and 0.7% sequentially, while when adjusting for higher commercial real estate payoffs, sequential loan growth was flat.

Strong deposit growth continues to be a key story as total deposits increased both sequentially and year-over-year to $13.6 billion driven by growth in total demand deposits which represent approximately 59% of total deposits. We continue to use excess liquidity to strengthen our balance sheet by reducing higher cost CDs, FHLB borrowings and sub debt which, in total, declined $1 billion or 33% year-over-year. Key credit quality metrics such as nonperforming assets, criticized and classified loans, and net charge-offs as percentages of total portfolio loans have remained at low levels and as shown on Slide 11, are favorable to peer bank averages in recent quarters. In fact, total loans past due in criticized and classified loans as percentages of total loans were lower compared to both the third quarter and the prior year period, as were nonperforming assets as a percentage of total assets. Further, net charge-offs to average loans were just 2 basis points for the year, representing a 4 basis point decline from the prior year.

The net interest margin in the fourth quarter came in at 2.97%, decreasing 34 basis points year-over-year primarily due to the lower interest rate environment as well as a mix shift on the balance sheet to more securities, which now represent approximately 24% of total assets versus 17% last year. Further, additional cash held on the balance sheet negatively impacted the net interest margin by approximately 13 basis points for the quarter. Reflecting the low interest rate environment, we reduced the cost of total interest-bearing liabilities by 25 basis points year-over-year to 20 basis points as we lowered deposit rates including certificates of deposits and continued to reduce FHLB borrowings and paid off $60 million in high-cost sub debt.

Turning to noninterest income, for the fourth quarter of 2021 -- was $30.7 million, a decrease of 6.1% year-over-year, primarily due to lower mortgage banking income from our continued efforts to retain more residential mortgages on the balance sheet. Residential mortgage originations of $383 million during the fourth quarter represented the second best quarter on record, while the amount retained increased from 35% last year to approximately 70% in the fourth quarter. In fact, during 2021, total residential mortgage originations were a record $1.4 billion with approximately 55% purchase or construction money.

While we remain committed to expense management as demonstrated by year-to-date efficiency ratio of 58.2%, we continue to make the appropriate investments in our company as we focus on the organic growth potential within our markets. Excluding restructuring and merger-related expenses, noninterest expense in the fourth quarter of 2021 increased $0.5 million, less than 1%, to $88.1 million compared to the prior year period.

Salaries and wages benefited from lower full-time equivalent headcount and increased $1.3 million or 3.3% year-over-year due to higher securities broker and residential mortgage originator commissions from organic growth. In conjunction with our core banking software conversion, please note the movement of approximately $1 million of quarterly online banking costs from other operating expenses to equipment and software expense in the fourth quarter and going forward.

As of December 31, 2021, we reported strong capital ratios with Tier 1 risk-based capital of 14.05%, Tier 1 leverage of 10.02%, CET1 of 12.77% and total risk-based capital of 15.91% as well as a tangible common equity to tangible asset ratio of 8.92%. During the fourth quarter, we repurchased approximately 1.6 million shares of our common stock on the open market for a total cost of $54.7 million. And for the 12-month period, we repurchased 5.2 million shares, which represents approximately 8% of shares outstanding from the beginning of 2021. As of December 31, 2021, approximately 1.4 million shares remained available for repurchase under the existing share repurchase authorization. Since then and through January 20, we've repurchased an additional 250,000 shares at a total cost of $9.2 million.

Now I'll provide some thoughts on our current outlook for 2022. We remain an asset-sensitive bank and subject to factors expected to affect industry-wide net interest margins in the near term including a relatively flat spread between the 2-year and 10-year treasury yields in the current overall lower interest rate environment. We are currently modeling three 25 basis point increases in the Fed's target federal funds rate during May, July and November of 2022. Until those potential rate increases begin to provide benefit, we anticipate that our GAAP net interest margin may continue to decrease a basis point or 2 per quarter due to lower purchase accounting accretion and lower earning asset yields.

We anticipate some margin accretion in the first half of 2022 from PPP loan forgiveness as the remaining balance is expected to run off by midyear. Likewise, the remaining net deferred fees of $6.1 million are expected to accrete to income by midyear as well.

In general, we currently anticipate similar trends in noninterest revenue as we experienced during 2021. Residential mortgage originations should remain strong, but at lower levels than the record volumes realized during 2021. In addition, we continue to anticipate retaining a greater portion on our balance sheet, reflecting the potential rising rate environment. Commercial loan swap fee income, which totaled roughly $6 million during 2021, should continue to be relatively strong. Trust fees, which are influenced by trends in equity and debt markets, should benefit from organic growth.

Securities brokerage revenue should continue to improve slowly through organic growth and potential expansion within our Mid-Atlantic market, which was delayed due to the pandemic. Electronic banking fees and service charges on deposits will most likely be similar to the second half of 2021.

Similar to the rest of the industry, we're not immune from inflationary pressures during 2022, but will maintain our diligent focus on discretionary expense management. That said, we will continue to make prudent investments in our current employees, new hires and technology platforms in order to remain competitive and help drive organic growth. We are still planning our annual midyear merit increases and currently anticipate somewhat higher marketing spend during 2022 to supplement our focus on organic growth. Overall, we currently anticipate operating expenses to be up modestly during 2022 from the $88.1 million reported in the fourth quarter due to the factors mentioned above, predominantly investments in our people and general inflationary pressures.

The provision for credit losses under the CECL will likely depend upon changes to the macroeconomic forecast and qualitative factors as well as various credit quality metrics, including potential charge-offs, criticized and classified loan balances, delinquencies and other portfolio changes. In general, continued improvements in the macroeconomic and other noted factors should result in a continued reduction in the allowance for credit losses as a percent of total loans during 2022 but at lower levels of quarterly reserve releases as compared to 2021.

Share repurchase activity is expected to continue at a relatively similar pace as 2021, subject to pricing levels, volume restrictions and future share repurchase authorizations.

Lastly, we currently anticipate our full year effective tax rate to be between 17% and 19%, subject to changes in tax legislation, deductions in credits and taxable income levels.

We are now ready to take your questions. Operator, would you please review the instructions?

(Operator Instructions) The first question comes from Russell Gunther of D.A. Davidson.

Could we start on the margin outlook, please? I appreciate the thoughts in terms of core trends until the Fed begins to move. But could you guys take a stab at quantifying the impact from each of those 25 basis point hikes you anticipate? And if you could touch on deposit beta assumptions, that would be really helpful.

Sure, sure. Glad to do that. Dan, do you want to handle the margin question?

Sure, Todd. Yes, so obviously, we are an asset-sensitive bank, and we expect to benefit from a rising rate environment due to our asset sensitivity as well as our historical lower betas. Just to put some of this into perspective, we're holding about 7.5% right now of cash on the balance sheet. That will reprice immediately. Also, about 65% of our commercial portfolio is variable and about 30% or so of that variable will reprice as well immediately. So there's a benefit there certainly on the front end. We've also got about $1.6 billion of variable rate loans that are currently priced at their floors. The average floor is right around 3.83%. And about 75% of that would reprice with 3 rate increases. 25% of that reprices with the first rate increase.

As it relates to betas, we saw back in 2018, when rates increased the last time, we maintained a much lower beta than our peers. Generally speaking, it was sub-20%. And today, I would say, with cost of deposits being 13 basis points, just 8 basis points when including noninterest-bearing deposits and with a loan-to-deposit ratio of about 73%. Excess balance sheet liquidity, cash, representing about 7.5% of our balance sheet, I think there's a lot of runway to allow deposit rates to continue at their current levels. So really, I hope that kind of answers the question.

Yes. No. Very comprehensive, I appreciate it. And then just switching gears for my follow-up to the expense side of things. So the commentary there is up modestly from the 4Q run rate. Does that anticipate any action from an expense initiative perspective, whether that's additional branch rationalization beyond what you've done the last 12 months? Is there anything to do there? And if not, could you just help ring-fence sort of what that step-up could be from current levels?

Sure. Yes, I'll be glad to answer that. We do have additional branch optimization strategies. We're continuously looking at rationalizing the branch network. We made a big announcement. Big for us, I guess, in the third quarter last year, where we said we were going to do 20 or 25, and we did that. I would say we're looking at another 10 or so branches that we would probably rationalize here over the next quarter or 2. We're not making big announcements about it and putting names on it and all that kind of stuff. It's just something we do in the ordinary course of business. So we would expect another probably 10 or so branches to be consolidated as the year progresses and we identify those.

The next question is from Casey Whitman of Piper Sandler.

Sorry if I missed this in your prepared remarks, but did you guys give an outlook for loan growth over the next couple of quarters, years? And sorry if I missed it.

No, we didn't. I mean, I think our long-term trend is still mid- to upper single digit is what we'd like to be. I think we see the trends heading in the right direction. I mean the pipeline trends are up quite a bit. Actually, they're up a little bit over -- pipeline is a little bit over 20% bigger now than it was just at the end of the year. So a nice movement in the last month.

The commercial real estate loans that are going to the secondary market has slowed considerably. I would expect that to continue to slow this quarter, still be -- maybe a little bit elevated from our historical run rate, but probably improved over the fourth quarter. And I think that, coupled with kind of some of our strategies to retain some of those commercial real estate loans rather than just let them go to the secondary market -- to try to retain some of those within our risk standards for a period of time. If you look at all that together, coupled with I just think kind of the continued economic recovery, while not a straight line, it's generally moving in the right direction, we would expect to get positive trends on the loan side given those actions and also our recruiting efforts as well, too. So I think as we get later in the year, we'll see that it's hard to predict. We don't give a lot of guidance anyway over the next couple of quarters because it's just based upon things that haven't happened yet, but feel relatively good about the things that are going on.

And I think the key here, too, is we're working really hard to stay within our risk parameters. We had, gosh, $200 million in the fourth quarter of really pretty solid credit tenant loans that we passed on that just were out of footprint, west of the Mississippi type of things. They were good loans. And if we had done those, that would have been 5% loan growth, but it just doesn't fit with our risk parameters. So we passed on them because I think we want to make sure that we're doing the right things long term for the company and not reacting to a quarterly number. But you know on a $10 billion balance sheet, it doesn't take many loans to move the number from a 0.5% negative to 0.5% positive. I mean it's 2 or 3 decisions. So we feel like we're right where we need to be, but we'd anticipate loan growth materializing as we get later in the year. And we're focused on it. We know that's the key question people have with regard to WesBanco.

And as we look at the elevated pay downs, which I appreciate have come down, I mean, are you seeing any big differences across various markets? Or are there certain markets that kind of stood out for the pay downs?

I would say, no. Most of our real estate that would go to the secondary market are in our urban areas, right? So that's where the bigger projects are as opposed to the rural parts of our footprint. But would be Louisville, Lexington, Columbus, Cincinnati, Pittsburgh, and then the Mid-Atlantic markets. That's where we would typically see the paydowns occurring. And I think as rates are backing up a little bit or going up a little bit, I think that will maybe keep some things from going to the secondary market and also just the nature of the mix of the portfolio, right? I mean we had heavy paydowns last year. So at some point, that -- you reach that balance threshold where that which is going to go to the market went. And I think we pulled a lot forward into last year in terms of things going to the secondary market early.

The secondary market is still aggressive. I did some research with our Head of Commercial Real Estate before this call and asked him kind of what he's seeing out there in the secondary. And so -- they're getting aggressive, they're fighting back. With rates going up, they're reducing the margin that they're accepting. So we're still battling the secondary market, but I think we're winning that battle. And I just think the metrics of the portfolio and the math works that, that which was going to leave us has gone, and we're continuing to originate construction loans and the pipeline there looks pretty good, too.

The next question is from Brody Preston of Stephens.

Dan, nice to have you on the reins for the first call. So I guess I just wanted to circle back, Todd, on the loan growth commentary. I think correct me if I'm wrong, but you said that the pipeline is 20% bigger today than it was at year-end. Is that correct?

Yes, I think like $580 million up to $700 million.

Okay. Can you give us a sense for what the pipeline looks like in terms of C&I mix versus CRE, just because I know those CRE prepayments and paydowns have been a bit of a drag.

But I think pretty balanced and probably representative of our portfolio as a whole. We got 15% to 20% of our portfolio of C&I and then a good chunk is real estate. So I think the pipeline is somewhat representative of that. It's granular, and it's across all markets. So I think that's a real positive for what we're seeing. I can't see any of our markets that are outliers in terms of having issues or challenges or anything like that. They all seem to be doing okay. And impacted a little bit with aggressiveness I think on the people borrowing on their C&I lines still. So it's a little bit depressed, just the supply chain issues and things like that. But I really see that improving as we get later in the year. And hopefully, we'd get back to a more normalized level of line usage.

Now that's not showing up in the pipeline. Obviously, those are existing loans that are on the books that would just be used. But the pipeline, I would expect it to continue to build as we get later in the year as well, too. I mean we've got some campaigns out there we had in the fourth quarter to generate additional loan volume. Our lenders are back out on the streets, meeting with customers. We're continuing to recruit lenders. I've got interviews later today myself for additional lenders in the franchise, and we had talked about LPOs that are close to markets that we're in now like a Nashville or Northern Virginia. We already got a residential mortgage lending team in Northern Virginia.

So we're continuing to move forward on those things. They take a quarter or 2 to materialize. But I think that, in and of itself, will build the pipeline as well.

Understood, understood. And then maybe just on securities. You guys continue to have success on deposits and the cash continues to grow on balance sheet. You're a little bit more aggressive earlier in the year on securities purchases. I guess, where do you envision securities growth from here just given all the excess liquidity?

Yes. I mean we're around 20% , 24% or so of the balance sheet to be in securities. And we think that's probably a good range to look at. We're not looking at building a big securities book here and even this low rate environment that we're in. But it's 1 of the reasons why we put more of the resi portfolio on our balance sheet in the last quarter or so is because it's our credit. We underwrote it. We understand it. But we want to use some of that liquidity as well too.

So I think we'll keep powder dry with the expectation that we would get loan growth that would eat that up. But also at the same time, I don't see us taken the securities portfolio down significantly. I think our team has done a pretty good job of when they can get a little bit of yield without taking too much duration risk, they'll take advantage of that. But I'd put us in a cautious camp with regard to wanting to deploy a lot of cash into securities right now.

I think we'll run at a loan-to-deposit ratio that should get better, obviously, within the course of the year through loan growth. But also with that low deposit beta that we have, I mean, I can't see anything in the near future that would cause us to raise deposit rates. I mean we didn't raise deposits much of anything in 2018. And I can't even begin to think of when we would want to start considering raising deposit rates. So we'll have a lot of opportunity, I think, for margin improvement as rates go up. And then with net interest margin as balances go up, as rates go up. And I think that's going to be the key to our executing on that part of it that we can control this year.

Got it. And do you happen to know what the duration of the securities portfolio is? And what percent of the book is floating rate?

Dan, do you have that available?

Yes, Brody, the duration is 4.5 years and the variable portion is approximately 17% of the portfolio, about $700 million.

Okay. And then, I guess, maybe I should have been a little bit more specific because I think 1/4 of your book is HTM. So do you know what the duration on the AFS portfolio is?

Yes, it's all in AFS. It's -- yes, 17%.

No, no. The duration of the AFS portfolio.

My apologies. It's closer to 4.5%. It's right in line. HTM is a little longer than AFS, but AFS is -- yes, right around 4.5.

All right. And if I could sneak 1 more in. Todd, it was nice to see the deposit service charges start to normalize this quarter. And so it's a bit of a 2-part question. You all don't have big exposure to overdraft at all. I think it's like through the third quarter, at least, it was like about like 0.6% of revenue. And so I guess with that not being much of a headwind, do you expect to see deposit service charges continue to normalize back towards maybe 2019-ish kind of levels? And then separately, I know it's only a small portion, but are you doing anything on overdraft that we should be aware of to kind of reduce that for your customers?

I think on just activity in general, as you get more just economic activity, people out and about, and obviously, as deposit balances would come down over time as well, too, that generates additional service charges. But -- so we would expect it to continue to rise gradually over time just as the bank grows as well, too.

Specifically with regard to overdraft charges, we continue to talk to our customers, survey our customers, kind of look at trends that are going on in the industry and try to make sure that we're staying on top of value provided versus the costs and things like that. So we continue to evaluate it. I don't have anything to announce with regard to that. We feel good about where we're at as a bank. And you're right, you highlighted it's not a big percentage of our earnings stream anyway. But it is something that we continue to monitor.

The next question is from Steve Moss of B. Riley FBR.

Maybe just in terms of -- on the reserve, I hear you guys in terms of just further reserve bleed. Just kind of curious as to how you guys are thinking about where the allowance to loans could bottom out over time?

Sure. Dan, do you want to handle that?

Sure, Todd. Yes. So if we think about the reserve right now, we're at 1.27% excluding PPP loans. And I would say that probably the absolute bottom would be where we started when we adopted CECL, which was 88 basis points allowance coverage ratio there. And if you recall, that at that time, I believe the unemployment forecast for the next 2 years was right around 3.5% -- 3.5% to 3.6% for the upcoming 2 years. So that's about as probably as good as it gets when we adopted CECL, 88 basis points.

I would say that dependent upon the recovery, dependent upon the COVID factors, dependent upon the higher -- some of the higher risk portfolios that we have and how they perform over the next year will really kind of determine where that lands, but there's certainly a downward trajectory. And you obviously saw a pretty significant negative provision this quarter at $13.6 million compared to a negative $2 million in the third quarter. And really, a lot of that is just the continued improvement that we're seeing at the borrower level in some of those higher-risk portfolios. A lot of the financial metrics are just -- they are at or near pre-pandemic levels, which is really a great story. And so we're really -- the CECL model projects that momentum forward. So that's kind of -- hopefully, that kind of answers the question there.

Yes. And I would add to that, too, if (inaudible) where we were at a year ago relative to peer group non-reserve, I think we were 5 or 10 basis points higher than the peer group. And that's where we're at today, right? So everybody has different assumptions that happened during the course of the last year. I think we released a lot in the second quarter, not so much in the third, quite a bit in the fourth. But we all ended up in kind of the same spot, right? So at the [1.25, 1.27] that we're at today. We get surveys with peers, they are all around 1.2 or so. So we feel like we're right in line with that.

And we're conservative. You guys know we're a conservative company and you go back to a year, 2 years ago actually now, when we started putting deferred loans out there. Remember, we went out, we had 21% or 22% of the portfolio deferred because we were active. We went out there right away with our customers. Happy to say that we don't really have much of anything on deferral anymore. I think we've got 1 or 2 loans. But I think that's it. Everything is paying as agreed and come back really, really strong. So we try to be conservative. You see that in our underwriting. You see that in how we approach our business. But from a reserve standpoint, to the [answer why] -- we continue to see it moving lower. But who knows if you get another variant, you get different things that happen. Hopefully, we don't get into a recession anytime soon. We don't anticipate those kind of things. So barring that, it should continue to trend lower. But I would imagine we would trend lower in line with the industry.

Okay. That's helpful. And then just on M&A, Todd. Just curious as to any updated thoughts you may have, how is level of chatter going and that versus a buyback here?

Sure, sure. Yes, there was more activity, obviously, people talking to each other and whatnot. I would tell you, I'm firmly focused on answering the organic growth story and organic growth question. We've acquired into other markets over the last 6, 7, 8 years that were higher growth markets than our legacy markets, and we really want to emphasize the organic growth reasons behind doing that. So I don't want to -- I really don't want to confuse that story by throwing a merger in the mix. And all of a sudden, it's -- what does that do to your numbers for a year or 2 because I feel like we've got a good story that we'll be able to execute on here over the next year or 2. So I really want to stay focused on that.

But having said that, we've got plenty of capital. We've also got our core upgrade that was done last year. I think we're positioned if the right thing came along, we could do it, but we're not looking for it. So we're not actively out there trying to find a deal. But if things come across the transom, I think we're prepared to take a look, but it sure isn't a priority for us at this point.

Your next question is from Stuart Lotz of KBW.

Most of my questions have been asked, but just, Todd, I wanted to circle back to your commentary on potential LPO in Nashville. Just curious, is that a conversation that has been in the works for a while and maybe how far along are we with that? And outside of Northern Virginia, are there any other markets such as Charlotte, or maybe Philadelphia that you would potentially look at for another team lift out or entrance via LPO?

Yes. We're really not looking too far. We're not going into those other markets because there are markets we don't really understand, and they're kind of a ways away. I mean, I was President of Fifth Third's Nashville operation for several years. So I kind of know the market to some degree. And there's a lot of banks, I think that are trying to establish LPOs in Nashville right now. So it's early, early in the process. What we've done is we've engaged recruiting firms to help us in Nashville, Northern Virginia and Indianapolis and Cleveland. So those are kind of the markets that we're looking at. Also, I was President of a bank in Cleveland for a few years.

So it's mostly markets that we know, and if they're close to where we've been historically, they're markets that we could someday expand from an M&A standpoint in there. But the strategy isn't to develop a bunch of loan production offices. It's just to get -- to know a market a little bit better that we might think longer term, we could be a bigger player. The bank did the same thing 10, 12 years ago with Pittsburgh, established an LPO in Pittsburgh, and then we ended up doing 2 acquisitions over the last 10 years in Pittsburgh.

So that's what's going to keep us kind of tight geographically to a Nashville or to a Indianapolis or Cleveland or Northern Virginia because those are markets that we kind of view as really close to markets that we're already in.

So it's early, but this is also the right time to be talking to teams and individuals because they're about to get their payouts, and everybody kind of becomes a free agent for a period of time and they're kind of looking around. So we want to capitalize on that. Hopefully, we'll have some more to talk about on that in the second quarter.

Great color. And then maybe just one more kind of bigger picture profitability question. I appreciate the expense guidance for the kind of modest growth this year. As we think about if we start to see kind of lower reserve releases and maybe inflecting core net interest income, I mean where do you see your efficiency ratio kind of trending from here? I think we were back above 60% for the first time in several quarters. And then maybe from a PPNR standpoint, back in 2019, you were around 170 range. You're down to about 120 today. Do you think we've kind of reached the bottom from a core earnings standpoint there? Or should we -- do you think we'll have to wait for several rate hikes to really see meaningful improvement?

Yes. I would say with regard to the efficiency ratio, that's obviously dependent upon the shape of the yield curve, and we're all facing the same thing with regard to that. We want to see a steepening of the yield curve. I would say on the efficiency ratio, we want to make sure we're in the top half or the best half of the industry. As you mentioned, we are above the 50s -- into the 60% range. And I think that's because of the shape of the yield curve to some degree, loan growth as well, too. So I would say top half of the industry is where we want to be. But I think the efficiency ratio is going to be determined a big degree based on things that we can't control or predict at this point in time. So those things that we can control like our expenses, loan growth to some degree and margin management is where we'll focus. But I think 90% of what's going to drive the efficiency ratio is going to be -- maybe 80%, is going to be based upon what happens to the yield curve over the next year or 2. So we'll try to make sure that we stay efficient clearly, but we want to be in the top half of the peer group.

This concludes our question-and-answer session. I would like to turn the conference back over to Todd Clossin for closing remarks.

Sure. Thank you. Overall, our earnings are good. Our capital levels are good. Our liquidity is good. Our expenses are good. I think we're making the right investments in technology. And I think we're returning capital to our shareholders appropriately. We do agree organic loan growth is our challenge at this point. And we're addressing it, but we're going to do so while keeping within our historic risk profile. And I hope that's the message you got from us today.

Again, I want to thank you for your time. Look forward to speaking with you in the near future at one of our upcoming investor events. Please stay safe, and have a good day. Thank you.

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