Premier Financial Corp.

and welcome to the Premier Financial CARP fourth quarter and year-end 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star, then one on a touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Tara Murphy. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for today's fourth quarter and full year 2020 earnings conference call. This call is also being webcast, and the audio replay will be available at the Premier Financial Corp. website at premierfincorp.com. Following leadership's prepared comments on the company's strategy and performance, they will be available to take your questions. Before we begin, I'd like to remind you that during the conference call today, including during the question and answer period, you may hear forward-looking statements related to future financial results and business operations for Premier Financial Corp. Actual results may differ materially from current management forecasts and projections as a result of factors over which the company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release and in the company's reports on file with the Securities and Exchange Commission. And now I'll turn the call over to Mr. Heilman for his comments.

Thank you. Good morning and welcome to our call. Joining me on the call this morning to prepare remarks on our financial performance is our CFO, Paul Nugester, as well as Gary Smallbank, President, and Matt Garrity, Chief Lending Officer. Vince Liusi, Chief Banking Officer, will also be available for questions. Last night, we issued our fourth quarter and full year 2020 earnings release, and now we would like to discuss that release and provide some insight into 2021. At the conclusion of our remarks, the team will take any questions you might have. While 2020 was a very challenging year for the company on many fronts, With the merger of equals, the pandemic, our system conversion, and the branding change, we were able to successfully navigate through the challenges and show strong core operating results for the quarter and the full year. I am pleased with our results and the momentum in the balance sheet growth, financial strength, credit quality, and strategic performance that carries us into 21. The fourth quarter of 2020 net income on a GAAP basis was $30.8 million or $0.82 per diluted common share compared to $12.5 million and $0.63 per diluted common share in the fourth quarter of 2019. Net income excluding merger costs for the quarter was $32.6 million or $0.87 per share compared with $13.2 or $0.66 per diluted common share in the fourth quarter of 2019. For the year ended December 31st, 2020, Premier Financial earned $63.1 million or $1.75 per diluted common share compared to $49.4 or $2.48 per diluted common share for 2019. Net income for the full year excluding merger costs and provision was $99.3 million or $2.76 per diluted common share with $57.4 or $50.7 million, or $2.54 per diluted common share, in 2019. At the quarter end, our total assets were $7.2 billion. Loan growth, exclusive of the impact of PPP loans and the deposit growth trends in the fourth quarter, were healthy in this environment. Deposit growth continues to outpace loan growth as customer deposit activity remains strong. Our core efficiency ratio ended the year at 50, compared to 59% for 2019. For the fourth quarter, our ROA was strong at 1.73 and 1.83 on a core basis. This represents continued financial strength and an improving credit profile at year end. Our ROA for the full year was 0.96 compared to 1.5 for 2019. Core ROA was 1.5 for 2020 compared to 1.54 for 2019. Net charge-offs for the quarter were five basis points, or $680,000 compared with a net charge-off of $91,000 in the fourth quarter of 2019. Overall, net charge-offs remain under our long-term expectations. Our allowance for loan loss ended the year at a strong 1.49%. As you might recall, we have adopted CECL. And Paul will add more details on the reserve movement shortly. We are pleased with the trend in non-performing assets this quarter. The total assets is 0.73 percent, just up slightly from last quarter and consistent with our expectations at this point. The overall credit profile of the organizations continues to remain very strong. As we look into 21, our continued ability to grow our loan portfolio will be a key strategic focus for us. We are very satisfied to see an increase in loans across our footprint in the fourth quarter, driven by our metro markets, even in the face of strong competitive pressures relating to lower interest rates and the difficult economic conditions driven by the pandemic. We are very pleased to announce an increase in our first quarter dividend of $0.24 per share, representing a 9.1% increase from a year ago and a current dividend of approximately 4%. We also increased the authorization limit for buyback to 2 million shares. These actions reflect continued confidence in our overall performance and reflective of our expectations of our strong capital levels and are consistent with our overall capital management strategy. We enter the year with a strong capital position and will continue to review on a quarterly basis our capital management and would expect that as performance levels are maintained and improved, we would have the ability and the desire to move the dividend payout ratio toward the 35% level, which is our long-term desired level. I will now ask Paul to provide additional financial details for the quarter before I conclude with an overview. Paul?

Thank you, Don, and good morning, everyone. I'll summarize our fourth quarter and full-year financial performance. Beginning with the balance sheet, total loan growth may appear somewhat muted due to the beginning of PPP extinguishments. However, we generated almost 100 million of normal commercial loan growth, which would be an 11.5 percent annualized growth rate. Offsetting this was 56.4 million of PPP extinguishments, which began as a part of the forgiveness program. Residential loans, again, had good origination volumes, but continued prepayments and refinancings resulted in a $9.7 million net portfolio reduction, although we did have a 13.6 million a dollar increase in loans held for sale. And consumer loans declined again by $12.7 million this quarter. For deposits, we grew another $252 million from September 30 for an annualized growth rate of 17%. Non-interest deposits increased as businesses retained cash at year-end and represented about 26% of total deposits at December 31st versus 25% at September 30th. Due to excess liquidity, we added 158.5 million of security investments during the quarter as we focused on net interest income dollar growth. Next, I'll explain the allowance. As a reminder, we previously adopted CECL effective January 1st. For fourth quarter, the allowance decreased 6.8 million due to a provision recovery for loans of 6.2 million and net charge-offs of 680,000. which only represented 0.05% of average loans. The net decrease in the allowance is related to a decrease in quantitative factors offset partly by non-PPP loan growth. Quantitative factors improved significantly during the quarter due to a better economic forecast, including a further improved national unemployment forecast. Given the forward-looking nature of the CECL model, This resulted in our ability to release some reserves. Risk migration did not move materially during the quarter, as an increase in classified loans was mostly offset by a decrease in special mention loans. And qualitative factors overall were essentially flat. So at 1231, our allowance coverage to total loans was 1.49%, which is down from 1.63% at 930. But if you exclude PVP loans, the ratio would be down to 1.61%, from 1.77% at 9.30. In addition, if you include the unamortized balance of purchase accounting marks, the coverage ratio would be 1.84% down from 2.04% at 9.30. Given the current economic outlook, we are comfortable with this reserve level at 12.31. Last for the balance sheet is capital, where we ended with 982 million of equity at December 31, up 23 million from September 30 primarily due to continued strong net earnings. At year end, our tangible equity ratio was 9.24 percent, and our total risk-based capital is estimated to be about 13.4 percent. Next, I'll turn to the income statement. As a reminder, year-over-year comparisons are obviously skewed by the fact that we have three in 11 months of operations, including UCSC, in the fourth quarter and full year, 2020, compared to none in 2019. I'll start with net interest income, which was $55 million for the fourth quarter of 2020. This resulted in a net interest margin of 3.47%, consistent with third quarter. This does include the benefit of accretion from purchase accounting marks, with $0.7 million coming through interest income and $0.6 million coming through interest expense. This also includes $3.6 million of interest income on PPP loans on an average balance of $426.5 million with $0.8 million of income related to extinguishments. Excluding the impact of marks and PPP, our net interest margin would be 3.36%, which is down from 3.41% on a linked quarter basis. This decline would be attributable to the excess liquidity, mostly offset by our increased security investments. For the year, we had $208 million of net interest income and a margin of 3.52%. This includes the benefit of accretion from purchase accounting marks with $4.4 million in interest income and $3.9 million in interest expense. This also includes $8 million of interest income on PPP loans with average balances of $291.3 million. Excluding the impact of marks in PPP, our full year net interest margin would be 3.42%, which is down from 393 in 2019. and this is obviously due to the extraordinary year we just experienced with interest rates crashing in relation to the pandemic-induced economic recession. While asset yields fell dramatically, our team did a great job reducing funding costs, which declined 52 basis points for the fourth quarter year over year. Non-interest income was almost $19 million for fourth quarter and represented 25% of total revenues. First, mortgage banking income was $5.4 million for fourth quarter 2020. Gains on sales of mortgage loans were $6.1 million, down from $13.8 million last quarter, partly due to seasonality as well as some decisions to retain balances for balance sheet growth. Servicing revenues and MSR amortization expense were each approximately $2 million and fairly consistent with last quarter. And we did have another negative valuation adjustment, but only for $0.5 million, which is down from $1.7 million last quarter, as rates and prepayment speeds settled a bit. Next, wealth management income came in at $1.8 million, an increase from $964,000 last year. And insurance commissions were $3.9 million, up from $3.1 million last year. Service fees and other charges increased to $4.8 million from $3.7 million last year. while BOLI and other revenues totaled $1.7 million. For the year, total non-interest income was $81 million, or 28% of revenues, and up from $45 million last year. Mortgage banking was a key contributor in 2020, with over $28 million of net revenues due to an incredible year of originations. And our other major business lines did well, including service fees at $21 million, up from $14 million last year, insurance at $17 million, up from $14 million, and wealth management at $6 million, up from $3 million last year. We also had over $1.4 million of security gains, but that was primarily due to the balance sheet restructuring we reported in third quarter. Next, I'll discuss expenses. First, we incurred $2.2 million in the last of our merger-related costs in the fourth quarter of 2020. So excluding merger costs, total expenses were $39.1 million compared to $39.9 million in the third quarter of 2020, with a decrease primarily due to other expenses that included $1.4 million FHLB prepayment penalty last quarter for the balance sheet restructuring, offset by some year accrual gross-ups. For the year, expenses totaled $165 million, or $144 million, excluding merger-related costs, and that FHLB penalty, which was offset by security gains. And we are very pleased with our core efficiency ratio of 50% for the year, which compares very favorably to 59% for 2019. Additionally, our core pre-tax pre-provision income was $143 million for 2020, which generated a strong 2.17% return on average assets. I'll wrap up with a summary of net earnings. On a gap basis, We reported net income of $30.8 million, or $0.82 per share, for the quarter. Merger costs this quarter represented $1.7 million on an after-tax basis, so excluding those costs, core earnings were $32.6 million, or $0.87 per share, up from $0.66 of core EPS in fourth quarter 2019. For the full year, gap net income was $63.1 million, or $1.75 of EPS, However, this included merger-related provision and costs, which were $20.5 million and $15.8 million after tax, respectively. Excluding those, core EPS for 2020 was $2.76 for an 8.7% increase from $2.54 in 2019. In conclusion, we finished the year very strong after completion of core conversion and synergies implementation. and we look forward to leveraging our solid capital levels and premier operating profitability as the economy begins to recover. That completes my financial review, and I'll turn the call over to Matt.

Thanks, Paul. This morning I will be providing an update on COVID-19-related deferral activity, along with thoughts on portfolio performance for the quarter and our outlook for asset quality moving forward. With respect to payment deferral activity, we're very pleased by the high rate of return to pay activity we experienced during the fourth quarter, as total deferrals are now down to 1% of total loans, or approximately $53.5 million, compared to 8.8% of total loans, or $482.7 million on September 30th. Return to pay activity during the quarter was approximately 94%, and we're at high levels in all loan categories, including our high sensitivity portfolio, which declined by over 80% during the fourth quarter. These loans that have returned to payment have also been paying as agreed, as evidenced by our payment delinquency performance during the quarter. In terms of asset quality performance, things stabilized during the fourth quarter. Levels of criticized loans remained relatively steady, and overall there was not significant amounts of migration into the classified loan category. Not performing assets as a percentage of total assets remain relatively stable when comparing the fourth quarter to the third quarter, as did overall payment delinquency. Our outlook for asset quality at this point is more optimistic than we have expressed in our previous quarterly calls. While we still expect some level of credit weakening, it is likely to be more episodic in nature at the individual loan level and not a large migration across the portfolio or portfolio segments. We see the beginning stages of coronavirus vaccination programs and another round of economic stimulus is positive developments. With that said, we remain diligent in monitoring and managing the portfolio while working with our clients through what is still a very challenging environment. I would now like to turn the call over to Gary Small to provide some insight into 2021. Gary.

Thank you, Matt. Excellent commentary on 2020. Now I'll provide some color on our performance expectations for 2021. From a balance sheet perspective, expect year-over-year commercial growth, excluding the impact of PPP, in the mid-single-digit range, very similar to our 2020 experience. The loan growth in total will be 3% to 4%, excluding PPP, as we continue to project little to no growth in the combined residential real estate and consumer loan portfolios. We would typically expect mid-single-digit growth in the residential category, but with the low interest rates still driving refi activity, we're taking a conservative approach when forecasting for 21. We do anticipate expanded securities portfolio in 21 versus 20, larger balance sheet driven by the excess deposit liquidity we're experiencing. Coordinate interest income, excluding the impact of marks and PPP, is really reaching a low point or at least a low plateau at this point, and we would expect 21 to be consistent with report results, if maybe just a tick lower. From a net interest income perspective, we'll be up 7% to 8% in dollar terms versus 2020. and that's five to seven excluded the expected PPP impact. Fee income, we're really looking for a flattish 21 versus 20. The residential mortgage income is projected to be down slightly versus a tremendous 2020. Returns revenue will be flat, again, versus a very strong contingent income component in the 2020 number. Asset management and trust income will experience growth in the low to mid-teens, And our bank service fees and interchange fees are projected as flat as household deposit growth continues to favor our clients. Interchange fees are conservatively projected to run at the same pace as 20 as we're not certain of the customer behavior as we head into the second year of COVID. From an expense standpoint, expect low single digit, less than 3% when adjusting for the 20 merger and acquisition related expenses. Generally speaking, This reflects the addition of one month of the old home savings expense category that would have reflected January of 20, offset by reduced duplicate costs associated with running two back rooms for a portion of 20. Within that same modest figure, we do plan to expand our commercial and residential mortgage teams in 21 and are already off to a good start to that end. From a credit perspective, the assumption for 21 will include moderate level of charge-offs, that being the 20 to 35 basis point range. We anticipate improvement in qualitative factors relative to our CECL calculation. We already are seeing that benefit. We'd like to see another quarter before and understand a little bit about COVID before making the adjustment. And we expect a more favorable core provision figure in 21 versus 20. In summary, the 21 plan delivers positive operating leverage with revenue growth exceeding expenses by about 2% when you adjust for M&A expenses. The annual earnings improvement coupled with buybacks should provide the 8% to 10% EPS range of year-over-year growth that's consistent with our three-year planning horizon. With that, I'll turn it back to Don.

Thank you, Gary. As I reflect on 2020 and the challenges that it brought. I'm very proud of all that we have accomplished as a team while achieving our eighth consecutive year of record core earnings performance. We brought together two very successful organizations to build a stronger and more competitive organization that remains committed to being a high-performing community banking organization. For Premier as a company and as a community bank, Our definition of success goes well beyond the numbers on our financial statements. Our employees have consistently risen to the challenge of finding smart solutions for our clients and communities and our shareholders. The synergies between our employees, both internally and within the communities we serve, have taken us to higher levels of performance and also have allowed us to demonstrate our ongoing commitment to our local communities and have provided us with the opportunity to reaffirm our commitment to an elevated our customer experience. During the fourth quarter, we launched a new campaign called Powered by Kind People Fueled by You. The bank will use this branding for all community outreach efforts going forward. Powered by Kind People represents the strong sense of passion that the bank's associates have for supporting our communities and the bank's commitment to giving back. Fueled by You represents the inspiration that the bank's clients and communities give to them to give back and spread kindness in the places we call home. As part of our kindness movement, we committed $535,000 to more than 75 organizations, bringing total donations in $20 to $1.7 million for the company and the foundation as a whole. We are honored to support our community partners in making our local commitment stronger especially in the time when COVID is having such a great impact and the need has never been greater. And just as we have remained dedicated to our communities as a company, our leadership and staff composed of experienced employees from both legacy organizations have shown tremendous dedication to each other and our clients. I am impressed with their commitment and the ability during the difficult operating environment, especially working remotely for a significant part of the year. We will continue to address key issues concerning people, processes, and technology as we look to the future. We are confident we will build upon our collective strengths and continue to adapt our operating environment based on the lessons we have learned throughout our conversion in this pandemic. In addition to heightened focus on our digital strategy, which will help us further enhance the customer experience in person, through our digital channels and within our internal operations. Our customers' expectations, especially pertaining to digital delivery methods, are changing at an accelerated pace, and we are committed to providing our clients quality products and services within our environment they prefer. We will rely on our customers and employees to help us identify ways to improve our customer experience through outreach and be part of implementing innovative solutions to reduce friction. As announced last night in our release, I will be retiring as CEO of Premier Financial Corp and Premier Bank at the end of March. At that time, I will become executive chairman of the board, and Gary will transition into the CE roles for both companies. Since this transition was planned as part of the merger grace, Gary and I have been working extensively together for quite some time so that the transition will be smooth and provide continuity and leadership for the company. I want to personally thank John Buchmeier, our chairman, for all his support and leadership through the merger of equals and the transition planning. John will remain an active board member. We appreciate the trust you have placed in us and your interest in Premier Financial Corp. We will now be glad to take any of your questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.

Yeah, they're all on.

The first question comes from Scott Seifers with Piper Sandler. Please go ahead.

Morning, guys. Thanks for taking the question.

Good morning, Scott.

Before I get started, congrats, Don and Gary, both of you on the official position changes coming up in the next few months. So I look forward to working in a new capacity. Was hoping maybe, Gary, for a little color on the expense trajectory into 2021. If I've done the math correctly, you know, if we just sort of Pop on a small bit of growth to the core 2020 expense base. Basically, what it implies is a run rate less than the $39.1 million of core expenses in the fourth quarter. So is there, I guess if I've done it correctly, which I hope I have, is there a point where expenses come down from the fourth quarter's base before grinding back up?

Scott, your math is always good, and I think the direction of your question is right. Paul, you've got the exact answer, but I know that for the full year, we're looking at a 150-ish kind of number for the full year by quarter.

Yeah, it'll bounce around a little bit with the quarters, but that's right, Scott. We're expecting about 150, which is around the 3%-ish growth off of the core 2020 results, and Gary kind of talked through some of the pieces of that earlier you know, 12 months versus 11 due to the timing of the merger close and adding some to the portfolio.

Okay, perfect. Thank you. And then maybe just on the fee side, so the downdraft and mortgage sequentially was maybe a little more than we've seen at some of your peers. Just curious how the quarter sort of shaped up relative to what you guys had been hoping for, and then just maybe a little additional color on the outlook for 2021. I know you said down slightly off the strong 2020 in your prepared remarks, but would just be curious for any additional thoughts on expectations into the new year.

Yeah, yeah, sure. I'll give you a little high level this fall, and then I'll hand it over to Matt for some more color there. But yeah, in the fourth quarter, part of it is seasonality. The fourth quarter is usually lower than summer and fall type stuff. But we also proactively started to retain some balances where we could, where it made sense to try and grow the balance sheet. We continue to have deposit growth. And as I mentioned in my remarks, looking ahead to 21 and forward, we're looking to focus and grow net interest income dollars. to the detriment of margin in the interim until loan growth really rebounds. So those are a couple of the main pieces, and Matt can give some more.

I would add on that on the quarter-to-quarter activity, that was a tactical adjustment that was specific in duration, and it equated to maybe about one month of activity that we were able to portfolio rather than sell, and then we moved right back into sales mode. Right.

Yeah, the only other comment I make on 20 is it's always a tough compare when you have just sort of an out-of-the-park Q2 and Q3. And I think we've tried to, on these calls, communicate that this was really rarefied error that we were playing in during those quarters. And the fourth quarter is actually, you know, on balance, a very good quarter in mortgage banking activity, all things considered. As we look at 21, you know, winning is going to be a little bit different for this quarter. Our expectation is that refi activity will lag a little bit compared to 2020, which is a safe call given the record amount of refi activity we saw in the industry. But we've done a really good job as an organization growing our team and growing our approach. There's opportunities within our markets for some additional product penetration into our Western markets, which we think will assist us greatly. So as we look at that and the expansion of our team, we've always had a really good construction and purchase business. So we think with those factors together, we're going to win a little bit differently in 2021. So we think we can really maintain the level of performance overall in mortgage that we saw in 2020.

Wonderful. All right. Thank you guys very much. Thanks, Alex.

The next question comes from Michael Perry with KBW. Please go ahead.

Hey, guys. Happy New Year. Thanks for taking my questions.

Good morning.

I wanted to start, you know, the balance pieces it would seem in 2021, you know, between, you know, kind of the accelerating, well, not sustained commercial growth, but the PPC balance is falling down. And I was wondering, you know, you gave some guidance around the pieces, but as we look at kind of the overall size of the asset base and the earning asset base, you know, any thoughts, Gary or Paul, in terms of how that should track in 2021? I mean, do you think the balance sheet will be sustained kind of in the $7.2 billion range and liquidity and stuff will just remix? Or do you think there's a chance that it could shrink modestly if there's some, you know, normalization of liquidity after PPP balances are forgiven? Or any thoughts around that would be helpful.

Yeah, sure. Yeah, you're right. PVP is a bit of a variable there, so kind of setting that to the side for just a moment. As Gary laid out, we are planning for growth in 21. With conditions improving, we will be focusing on our commercial loan growth as well as hopefully getting residential and consumer to at least kind of net each other out to some extent and maybe rebound. PPP will move things around, but even with that, we're going to have the current portfolio go through this forgiveness process, and we expect most of that will go away here in 21, and we'll get some fees off of that. But PPP round two has started up, and we're participating in that, so we'll get some new growth off of that. It won't fully offset everything that's going away on round one. But net net, you know, we're looking for low single digit growth on the overall loan portfolio, as Gary laid out there earlier, with the intention to grow the securities book with the liquidity that we've got, you know, we continue to get deposits, they continue to grow with PPP two, if that plays out the way PPP one played out, those deposits will come in. And so we'll We'll park them in securities. We'll get our net interest income growth. And then as the normal loan patterns start to come back into play, hopefully by the back half of 21 and into 22, we'll continue to grow at a normal, true normal pace from there.

So it doesn't sound like it's unreasonable to think that, you know, the 6.4, give or take, billion of average earning assets, I mean, that should probably grow low single digits in 2021. You know, even, you know, if we include the impact of PPP, that seems like a reasonable assumption.

Absolutely. Yep. That's our intention.

And I wonder if we could talk about capital for a minute. You know, obviously the ratios are pretty strong and getting stronger. I mean, once the Who knows when the PPP stuff will normalize, but, you know, ex-PPP, the TCE ratio will probably eclipse 10% at some point this year. Any updated thoughts, you know, about, you know, the group had a nice little movement here, buyback still in play, M&A, any updated thoughts that would be helpful?

Yes, we signaled, you know, we raised our dividend. We think there's more opportunity for that as we go through and see the strength, you know, of our performance here in the next quarter. You know, we authorized the buyback last night, so that's a signal of our desire to continue to utilize some of the excess capital. And as we position ourselves throughout the year, M&A is clearly on our strategic list of things to consider. And as that market starts to improve, we want to be a player and look at those opportunities as well, Mike.

Consistent with the history you would have with our organizations, we're not going to let capital stack up and go unutilized.

Right, and I was going to say, I mean, is it fair to think that, you know, obviously the focus out of the gate was going to be on combining the organizations and making sure, you know, a lot of the strengths of each were preserved, but It does position you as a larger player in an Ohio marketplace that would seemingly need to consolidate quite a bit. I mean, is that something that you think could start to come to fruition later this year? I mean, do you think there's any kind of roadblocks that could slow consolidation in that marketplace? And can you just remind us geographically how you view your footprint and what areas might be more focused than others?

Sure. Sure.

Clearly that M&A is on our interest list, if you will, for the remainder of the year. And I think there's a good opportunity as things start to accelerate. We saw a deal announced this morning. We expect that there will be other opportunities for us to consider if they fit with our strategy. And we're probably, as we talked about, we want to finish out the quarter. Some things we still need to get accomplished as far as the integration process. and get a solid base there, but we feel we will be ready in the second half for sure. You know, our footprint, you know, we're going to look at, you know, right now we're across the top of the state of Ohio, into Pennsylvania, southern Michigan, and Indiana. You know, I think any of those states, and particularly some of the opportunities in Ohio are going to be strong. Indiana, Michigan I think will be stronger than some other locations. But in general, we're going to look at, you know, contiguous opportunities within our footprint to grow the franchise. You're not going to see us jump multiple states or anything like that.

Okay. Very helpful. Thank you, guys. And then just lastly, you know, appreciate, Gary, all the outlook commentary for 2021. But, you know, if we could kind of summarize it a bit, it's, you know, Paul, you mentioned the core efficiency rate for 2020 was just under 50%. I mean, obviously with the positive operating leverage you guys are targeting, you know, it would seem like you expect to remain below 50% in 2021. I'm just curious, you know, what would be or what could be some of the impediments to that, you know, occurring as you expect in terms of, you know, what the risks of kind of the budget and, you know, potentially seeing some upward pressure in the efficiency ratio. What are some of the things we should be mindful of?

Sure. Yeah. I, You know, the things that come to mind on that there, Mike, would be if the economy doesn't turn the way we expect and that we start to get back to the growth patterns that we're forecasting, we will have to be very quick to pivot and focus on cost containment at that point. You know, we have built the structure in the organization to support growth, including adding some lenders for continuing to build that book there. So if those things aren't going to pan out, then we'll have to pivot like we always would in such environments and focus on the expense side to catch up to our bottom line expectations.

Helpful. But the budget does incorporate already some hiring activity. Is that safe to assume?

Yes, yes, yes. And those hires are already in. Mike, probably the biggest factor that could impact-wise would be just residential mortgage. And within that revenue number, there's a number of moving pieces. You've got the margin you make on the gain on sale, the actual volume you produce, MSR offsets. So when we put in the number, as Matt was saying, to stay consistent with a very strong 20 in overall residential mortgage, there's three good guys and a potential tough guy in there. And on balance, it makes us feel confident that we can hit that number. To the extent the market might move against us on any one of those, to Paul's point, we've got plenty of oars in the water that we can make adjustments.

Great. Thank you guys for answering all my questions for all the color. I appreciate it. Thank you.

As a reminder, if you have a question, please press star then one to be joined into the queue. The next question comes from Christopher Marnick with Jannie. Please go ahead.

Hey, thanks. Good morning, everybody. Just wanted to drill back on a couple of points from the last question. So first, on the mortgage margin, do you think that's going to be less than what you've recently experienced this fourth quarter? Give us a window into the budget for this year. Just kind of curious on how that compares.

Sure, Christopher. This is Matt. Our expectations for 2021 on the margin side for mortgage is overall it's going to be a little bit more challenging environment than 2020. I think the entire industry enjoyed a really nice margin year on mortgage banking. We think with a decline in refinance activity over the year at an industry level and the amount of capacity that has come into the industry, that that's going to eventually put pressure on margins as people tend to dive a little deeper to keep their engines running and keep their staffs busy. As we model it out, we still think Q1 is going to be a good quarter above expectation for margin as we would set our own expectations. We then think as the year goes on, we revert more back to what our baseline expectations are for margin and some of that largesse that we enjoyed in 2020 probably is not available for us in 2021.

Got it. That's helpful. And I guess I'm still in the big picture. I mean, as a function of the merger from a year ago, you're still in a better place in terms of being able to have a better margin overall. I mean, I think as a smaller company, you may have had less margin than you now do. Is that fair?

Yes, I would agree with that.

Okay.

And then just to follow up, Because of the margin offset, we still see production dollars being as high as they were this year. You know, not necessarily number of units because the per unit funding is going up. So that's a bit of a cushion. And we're just going to have a better MSR experience in 21 than we did in 20, which is also a good guy. So we'll do it in a different fashion, but we still think we can deliver to Matt's point with a number that's very similar to what we got out in 20.

Okay, that's helpful, Gary. Thanks. And just a final point on expenses. Are there any sort of new investments, you know, in digital or other things beyond just the mortgage, you know, commercial and residential hires that you talked about? And can you sort of pivot from those, if need be, back to, you know, the point about cost containment, possibly?

Now, you could share just in the mortgage business, because we just came up in, was it 18, when things got tight and we had to make some adjustments? How... quickly we can pivot within that group.

Sure. I would say, Christopher, we absolutely have the ability to pivot on the expense side. We have added capacity across our organization, not just in mortgage, to deliver higher levels of sales activity and lending activity, not only on the front end side, on the sales side, but on the support side as well. So, you know, we're constantly monitoring if that activity is meeting our expectations and, you know, meaning what we've staffed for. And I think we're pretty aggressive about having the right balance between letting things play out versus, you know, calling it as we see it and making that change. So that's something we monitor pretty closely, and I'm pretty comfortable that we would know what we need to do there.

Great. Thanks to the additional caller. I appreciate it. Thanks, Chris.

The next question is a follow-up from Scott Seifers with Piper Sandler. Please go ahead.

Hey, guys. Thanks for taking the follow-up. I guess maybe just a question on where you see the net interest margin heading. I think, Paul, you had suggested a couple times that the preference is for NII dollars rather than margin rate. Just curious, maybe even a broad sense for order of magnitude of pressure that you might have kind of embedded into into your core and II guidance.

Yep. Yeah. Yeah. I think Gary mentioned it earlier. We think we're pretty much near the bottom or very close to it. You know, there'll probably be a little bit of compression yet to experience here in 21, mainly due to the dynamics of what we talked about, about focusing on securities growth for dollar income while loans start to rebound and grow from there. So, you know, a little bit more. And we think of it mainly in that core context, you know, excluding marks and PPP because depending on what happens with the PPP program with extinguishments and the new round two and things like that, they can kind of move it around quite a bit. But, you know, we're down in the 336 for fourth quarter. So, you know, a few more bips down from there isn't unreasonable for 21. But we really think we're at an inflection point where we're starting to you know, will plateau. And once we get back into the back half of the year, if loan growth really does come through as we expect, you know, there's opportunity to start to potentially grow from there.

Okay. Perfect. Thank you. Within the quarter, the trend through the month was declining. Yeah. So we finished, say, with a better than the quarter as a whole. And while those securities will chip away at core margin, I think slight is the right word to put on it. Yeah.

Terrific.

Okay, good.

Thank you very much. Thanks, Scott.

This concludes our question and answer session. I would like to turn the conference back over to Tara Murphy for any closing remarks.

Thank you for joining us today as we discussed our quarterly and full year results. We appreciate your time and interest in Premier Financial Corp. Have a great day.

Thank you.

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