WesBanco Inc
NASDAQ:WSBC
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Good morning and welcome to the WesBanco Fourth Quarter 2021 earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. We ask that you limit yourself to two or three questions. If you have additional questions, you may re-enter the question queue. 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 one 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 material. These materials are available on the Investor Relations section of our website, WesBanco.com. All statements speak only as of January 26, 2022 the WesBanco undertakes no obligation to update them. I would now like to turn the call over to Todd. Todd?
Thank you, John. And 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 remain focused on ensuring a strong organization for our shareholders, and continue 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 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 after-tax merger and restructuring charges. On the same basis for the full year, we reported 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 recognition as they are a testament to their hard work and dedication. Just to highlight a few, WesBanco remains a leader 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 three key initiatives: leadership development, employee education, and community development. Due to the extraordinary efforts of hundreds of employees, we completed the conversion of our core banking software system to FIS's, IBS platform, which positions as 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 12 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 the 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 a 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 a prudent long-term decision for our shareholders and we'll 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 medic 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 amount of projects leaving. While 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 outsize fourth quarter payoffs, total sequential loan growth would have been flat. Furthermore, we still anticipate commercial real estate payoffs to decline to the next quarter or two 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 pipelines 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.
We're 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're looking to provide bridge financing options that will 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're 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're focused on controlling discretionary costs while actively encouraging our revenue producers to pursue new business. As I mentioned last quarter, the 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 provided boosted 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 months 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, the 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 [Indiscernible] reserve for both macroeconomic forecasts, 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. As higher level of payoffs as compared to our historical average negatively impacted total loan growth by approximately one percentage point when excluding PPP loans. Total portfolio loans decreased 4.9% year-over-year and 0.7% sequentially or 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 in sub-debt, which in total declined $1 billion or 33% year-over-year. The credit quality metrics such as non-performing 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 and 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 two basis points for the year, representing a four 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 the 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've lowered deposit rates, including certificates of deposit, and continued to reduce FHLB borrowings, and paid off $60 million in high cost of debt. Turning to non-interest income. For the fourth quarter of 2021 it 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 for construction money. While we remain committed to expense management as demonstrated by a 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, non-interest 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 31st, 2021, we reported strong capital ratios with Tier 1 risk-based capital of 14.5%, Tier 1 leverage of 10.02%, CET1 of 12.77%, and total risk-based capital of 15.91%, as well as the 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 31st, 2021, approximately 1.4 million shares remained available for repurchase under the existing share repurchase authorization. Since then and through January 20th, 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 two year and 10-year treasury yields in the current overall lower interest rate environment. We are currently modeling 325 basis point increases and the feds 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 two 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 mid-year. Likewise, the remaining net deferred fees of $6.1 million are expected to accrete to income by mid-year as well. In general, we currently anticipate similar trends in non-interest revenue as we experienced during 2021. Residential mortgage origination 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 deposit will most likely to 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 we'll 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 mid-year 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 forecasts 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 macro-economic 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 a full-year effective tax rate to be between 17% and 19% subject to changes in tax legislation, deductions and credits, and taxable income levels. We are now ready to take your questions. Operator, would you please review the instructions?
We will now begin the question-and-answer session. [Operator Instructions]. We ask that you limit yourself to two or three questions. If you have additional questions, you may re-enter the queue. [Operator Instructions]. The first question comes from Russell Gunther of D.A. Davidson. Please go ahead.
Hey, good morning, guys.
Good morning, Russell.
Morning.
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 data assumptions, that would be really helpful. Thank you.
Sure. Sure. Glad to do that. Dan, you want 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 some benefit there, certainly on the front end. We've also got about $1.6 billion of [Indiscernible] loans that are currently priced at their floors. The average floor is right around 3.83%. And about 75% of that would re-price with three rate increases. 25% of that reprices with the first rate increase.
As it relates to betas we saw back in 2018 when rates increase 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 eight basis points when including non-interest-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. Really, I hope that 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. 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 what that GAAP up could be from current levels?
Sure. I'd 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, I think for us, I guess in the third quarter last year when 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 two. We're not making big announcements about putting names on it, 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.
Great. Thanks for taking my questions, guys.
Sure.
The next question is from Casey Whitman of Piper Sandler, please go ahead.
Hey, good morning.
Hi, Casey.
Morning.
Sorry if I missed this in your prepared remarks. Did you guys given outlook for loan growth over the next couple of quarters, years? I'm sorry if I missed it.
No, we didn't. When I think our long-term trend is still mid-upper single-digit, that's what we'd like to be. I think we see that the trends heading in the right direction. I mean, the pipeline trends are up quite a bit. Actually they are up a little bit over, pipeline is a little bit over 20% bigger now than it was at the end of the year. So nice movement in the last month. The commercial real estate loans, as we're 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. I think that, coupled with some of our strategies to retain some of those commercial real estate loans rather than just let them go to the secondary market, 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 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. I think as we get later in the year, we'll see that. It's hard to predict. We're going to give other guidance anyway over the next couple of quarters because it's 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 working really hard to stay within our risk parameters. We had $200 million in the fourth quarter of solid credit tenant loans that we passed on, that just were out-of-footprint, west to the Mississippi type of things, that were good loans.
If we had done those, that would've been 5% loan growth, but that 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 don't want a $10 billion balance sheet. It doesn't take many loans to move the number from a 1/2% negative to a 1/2% positive, I mean, it's two or three decisions. So we feel like we're right where we need to be, but would 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.
As we look at the elevated pay downs, which I appreciate have come down, are you seeing any big differences across various markets or other certain markets that stood out for the paydowns?
I would say, no. Most of our real estate that would go to the secondary market are in our urban areas, so that's where the bigger projects are as opposed to our -- the rural parts of our footprint. But it 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, are going up a little bit. I think that'll maybe keeps the things have been going to the secondary market, and also just the nature of the mix of the portfolio. I mean, had heavy paydowns last year, so at some point that reached that balanced 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 go into the secondary market early.
Secondary market is still aggressive. I did some research with our head of commercial real estate before this call and asked him what he's seeing out there in the secondary and he saw they're getting aggressive. They're fighting back, their 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 in the math works that, that which is going to leave has gone and we're continuing to originate construction loans and the pipeline there looks pretty good too.
Okay. Thanks for taking my questions. I'll will write some notes upon.
Sure. Thank you.
The next question is from Broderick Preston of Stephens. Please go ahead.
Hey, good morning, everyone.
Hi, Brody.
Good morning.
And Dan, nice to have you on the range for the first call.
Good to be here.
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 that's 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 CRE pre-payments and paydowns have done a bit of a drag.
I think pretty balanced, and probably a representative of our portfolio as a whole. We got 15% to 20% of our portfolio as CNI and then a good chunk is real estate. 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, 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 on 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 two to materialize. But I think that in and of itself will build the pipeline as well.
Understood. Understood. 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. Where do you envision securities growth from here just given all the excess liquidity?
Yeah. I mean, we're around 24% or so for 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 that's one 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. I think we'll keep the powder dry with the expectation that we would get loan growth that would eat that up. But I also at the same time don't see us taking 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 the cautious camp with regard to wanting to deploy a lot of cash into securities right now. I think we'll run it 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 can't see anything in the near future that would cause us to raise deposit rates. We didn't raise deposit 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. Do you happen to know what the duration of the securities portfolio is? What percent of the book is floating rate?
Dan, do you have that available?
Yeah. Brody, the duration is 4 and 1/2 years, and the variable portion is approximately 17% of the portfolio, up to $700 million.
Okay. Then I guess, maybe I should've been a little bit more specific because I think a quarter on your book is HCM, so you know what the duration on the AFS portfolios?
Yeah. It's all in AFS, it's 17%.
No, the duration of the AFS portfolio.
My apologies. It's --
That's okay.
It's closer to 4.5%. It's right in line.
Okay.
HTM's a little longer, then AFS, but AFS is right around 4.5.
All right, and if I could sneak one more in, Todd, it was nice to see the deposit service charges starts to normalize this quarter. And so it's a bit of a two-part question. You all don't have big exposure to overdrafts at all. I think it's like, through the third quarter, at least it was about 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 in a normalized back towards maybe 2019ish 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 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, look at trends that are going on in the industry, and try to just make sure that we're staying on top of value provided versus the cost and things like that. We continue to evaluate it. We 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.
Thank you for taking my questions.
Sure.
The next question is from Steve Moss of B Riley, FBR. Please go ahead
Good morning.
Morning.
Maybe just in terms of -- on the reserve, I hear you guys in terms of just further reserve [Indiscernible], just kind of curious as to how you guys are thinking about where the allowance to loans could bottom out overtime?
Sure. Dan, you want to handle that?
Sure, Todd. Yes, if we think about the reserve right now, we're at 1.27% excluding PPP loans. I would say that probably the absolute bottom would be where we started when we adopted CSL, which was 88 basis points, allowance coverage ratio there. If you recall, at that time, I believe, the unemployment forecasts for the next two years was right around 3.5% to 3.6% for the upcoming two years. So that's about is probably as good as it gets. When we adopted CSL 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 -- 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. A lot of that is just the continued improvement that we're seeing at the borrower level in some of those higher risks portfolios. A lot of the financial metrics are just -- they are at, or near pre-pandemic levels which is really a great story. We're really -- the CSL model projects that momentum forward. So that's -- hopefully that answers the question there.
And I would add to that too. It kind of look [Indiscernible] at a year ago relative to peer group on reserve. I think we were five or 10 basis points higher than the peer group. And that's where we're at today. 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. So the 125-127 that we're at today, we get surveys, appears, they're all around 1.2 or so, so we feel like we're right in line with that. And we were conservative, I guess nowhere conservative company and go back to a year -- two years ago actually now, when we start putting deferred loans out there. Remember we went out, we had 20%, 21% or 22%.
The portfolio deferred because we were active, we went out there right away with our customers. I'm happy to say that, we don't really have much of anything on deferral anymore. I think we've got one or two loans, but that's it, everything's paying as agreed and come back really, really strong. 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 [Indiscernible] we continue to see it moving lower. But who knows, if we get another variant to different things that happened, hopefully we don't get into a recession anytime soon. We don't anticipate those kind of things, so borrowing that, it should continue to trend lower, but I would imagine we would trend lower in line with the industry.
Okay. That's helpful. Just on M&A, Todd, just curious as to any updated thoughts you may have, has level of chatter going that versus a buyback here?
Sure. Sure. Yeah there was more activity, obviously people talking to each other and whatnot. I would tell you, I firmly focused on answering the organic growth story and organic growth question. We've acquired into other markets over the last six, seven, eight years. There were higher-growth markets and our legacy markets and we really want to emphasize the organic growth reasons behind doing that. So I really don't want to confuse that story by throwing a merger in the mix and all of a sudden. What does that do to your numbers for a year or two, because I feel like we've got a good story that we'll be able to execute on here over the next year or two. 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.
Okay. Thank you very much. Appreciate all the color.
Sure.
The next question is from Stuart Lotz of KBW. Please go ahead.
Hey, guys. Good morning.
Hi, Stuart.
Most of my questions have been asked, but just Todd, I wanted to circle back to your commentary on potential LPOs in Nashville. I'm Just curious, is that a conversation that has been 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-fee LPO?
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 are kind of a waste away. I mean, I was President of Fifth Third's Nashville operation for several years, so I know the market to some degree. There is a lot of banks, I think, that are trying to establish LPOs in Nashville right now. It's early in the process. What we've done is we've engaged recruiting firms to help us in Nashville and Northern Virginia, in Indianapolis and Cleveland. Those are the markets that we're looking at. A lso, was president of a bank in Cleveland for a few years. It's mostly markets that we know and they're close to where we've been, historically.
The 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 our market a little bit better that we might think, longer-term, we could be a bigger player in. The bank did the same thing, 10, 12 years ago, with Pittsburgh. Established an LPO in Pittsburgh and then we ended up doing two acquisitions over the last ten years in Pittsburgh. So that's what's going to keep us kind of tight geographically to Nashville or to 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.
And so it's early, but this is also the right time to be talking to teams and individuals because they are about to get their payout. Everybody becomes a free agent for a period of time and are looking around, so we want to capitalize on that. Hopefully we'll have some more to talk about on that in the second quarter.
That's great color. And maybe just one more bigger picture profitability question. I appreciate the expense guidance for modest growth this year. As we think about -- if we start to see lower reserve releases, maybe inflecting core net interest income, where do you see your efficiency ratio trending from here? I think we are back above 60 for the first time in several quarters. And then maybe from a PP&R standpoint. Back in 2019 you were around 170 range, you're down to about 120 today, do you think we've reached a bottom from a core earnings standpoint there and -- or should we -- do you think about to wait for several rate hikes to really see meaningful improvement?
Yeah. 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 us 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 50 we're into the 60 range. And I think that's because of the shape of the yield curve and 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.
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 ratios is going to be -- maybe 80% is going to be based upon what happens to the yield curve over the next year or two. We'll try to make sure that we stay efficient clearly, but we want to be in the top half of the peer group.
Great. Thanks for taking my questions.
Sure. Thank you
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 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.