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Premier Financial Corp (NASDAQ:PFC)
Q4 2020 Earnings Call
Jan 27, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Premier Financial Corp. fourth-quarter and year-end 2020 earnings conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Tera Murphy.

Please go ahead.

Tera Murphy -- Vice President

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. Hileman for his comments.

Don Hileman -- Chief Executive Officer

Thank you. Good morning, and welcome to our call. Joining me on the call this morning with prepared remarks on our financial performance is our CFO Paul Nungester, as well as Gary Small, bank president, and Matt Garrity, chief lending officer. Vincent Liuzzi, 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 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 million or $0.66 per diluted common share in the fourth quarter of '19. For the year ended December 31, 2020, Premier Financial earned $63.1 million or $1.75 per diluted common share compared to $49.4 million or $2.48 per diluted common share for '19. Net income for the full year, excluding merger costs and provision was $99.3 million or $2.76 per diluted common share, with $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 remained 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 '19. Core ROA was 1.5% for 2020 compared to 1.54% for 2019.

Net charge-offs for the quarter were 5 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 nonperforming assets this quarter. The total assets is 0.73%, just up slightly from last quarter and consistent with our expectations at this point. The overall credit profile of the organization 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 ended the year with a strong capital position, and we'll continue to review on a quarterly basis our capital management and would expect that as performance levels are maintained and improve, 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?

Paul Nungester -- Chief Financial Officer

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 will be an 11.5% 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 increase in loans held for sale. And consumer loans declined again by $12.7 million in this quarter.

For deposits, we grew another $252 million from September 30 for an annualized growth rate of 17%. Noninterest deposits increased as businesses retained cash at year-end and represented about 26% of total deposits at December 31 versus 25% at September 30. 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 1. 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 12/31 our allowance coverage to total loans was 1.49%, which is down from 1.63% at 9/30. But if you exclude PPP 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%, and our total risk-based capital is estimated to be about 13.4%.

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 and 11 months of operations, including UCFC 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 will 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 and PPP, our full-year net interest margin will be 3.42%, which is down from 3.93% 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. Noninterest 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 the 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 noninterest 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 of $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 the 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-end accrual gross up. 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 GAAP 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, GAAP 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 now turn the call over to Matt.

Matt Garrity -- Chief Lending Officer

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 at September 30. 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 return to payment have also been paying as agreed as evidenced by our payment delinquency performance during the quarter. In terms of asset volume 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.

Nonperforming assets as a percentage of total assets remained 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 segment. 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?

Gary Small -- President, Director

Thank you, Matt. Excellent commentary on 2020. Now I'll provide some color on our performance expectations for '21. 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 will fall to -- 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 are experiencing. Core net 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 fourth-quarter results, it may be 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 5% to 7% excluded the expected PPP impact. Fee income, we're really looking for a flattish '21 versus '20. Residential mortgage income is projected to be down slightly versus a tremendous 2020. Insurance 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 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, we 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 '20, offset by reduced duplicate costs associated with running two backrooms 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 a moderate level of charge-offs in 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.

Don Hileman -- Chief Executive Officer

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 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 commitments 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 have -- 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 CEO roles for both companies. Since this transition was planned as part of the merger duties, 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 Bookmyer, 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.

Questions & Answers:

Operator

[Operator instructions] The first question comes from Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. Thanks for taking the question. Before -- sorry, 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, if we just sort of hop 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?

Don Hileman -- Chief Executive Officer

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 million kind of number for the full year by quarter.

Paul Nungester -- Chief Financial Officer

Yeah. It will bounce around a little bit with the quarters. But that's right, Scott. It will be -- we are expecting about, call it, $150 million, 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, 12 months versus 11 due to the timing of the merger close and adding some to the portfolio.

Scott Siefers -- Piper Sandler -- Analyst

OK. Perfect. Thank you. And then, maybe just on the fee side.

So the downdraft in 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 of the strong 2020 in your prepared remarks.

But I would just be curious for any additional thoughts and expectations into the new year.

Paul Nungester -- Chief Financial Officer

Yeah. Sure. I'll give you a little high level. This is Paul.

And then, I'll hand it over to Matt for some more color there. But yes, in the fourth quarter, part of it is seasonality, with fourth quarter usually lower than summer 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 detrimental margin in the interim until loan growth really rebounds. So those are a couple of the main pieces, and Matt can give some more color.

Gary Small -- President, Director

I would add on that, on the fourth-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 move right back into sales mode.

Matt Garrity -- Chief Lending Officer

Yeah. The only other comment I'd 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 area that we were playing in during those quarters. And the fourth quarter is actually on balance, a very good quarter in mortgage banking activity, all things considered.

As we look at '21, winning is going to be a little bit different from the [Inaudible]. 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 -- and 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.

Scott Siefers -- Piper Sandler -- Analyst

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

Operator

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

Mike Perito -- KBW -- Analyst

Guys, Happy New Year. Thanks for taking my questions. I wanted to start the balance sheet pieces. It would seem in 2021 between kind of the accelerating -- not the sustained commercial growth, but the PPP balance is falling down.

And I was wondering, 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, 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 as if there's some normalization of liquidity after PPP balances are forgiven? Or any thoughts around that would be helpful.

Paul Nungester -- Chief Financial Officer

Yeah. Sure. Yeah, you're right. PPP 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 2 has started up, and we are 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 1, but net-net, 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.

We continue to get deposits. They continue to grow with PPP 2. If that plays out the way PPP 1 played out, those deposits will come in. And so 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.

Mike Perito -- KBW -- Analyst

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

Paul Nungester -- Chief Financial Officer

Yeah, absolutely. Yes. That's our intention.

Mike Perito -- KBW -- Analyst

And I wonder if we could talk about capital for a minute. Obviously, the ratios are pretty strong and getting stronger. I mean, when -- who knows when the PPP stuff will normalize. But ex-PPP, the TCE ratio will probably eclipse 10% at some point this year.

Any updated thoughts about -- the group had a nice little movement here. Buyback's still in play or M&A. Any updated thoughts there would be helpful.

Don Hileman -- Chief Executive Officer

Yeah. As we signaled, we raised our dividend. We think there's more opportunity for that as we go through and see the strength of our performance here in the next quarter. 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.

Gary Small -- President, Director

Consistent with our history, Mike. Sorry, go ahead.

Mike Perito -- KBW -- Analyst

Gary, sorry, go ahead.

Gary Small -- President, Director

As I say, consistent with the history we have with our organizations, we're not going to let capital stack up and go unutilized.

Mike Perito -- KBW -- Analyst

Right. And I was going to say, I mean, is it fair to think that -- obviously, the focus out of the gate was going to be on combining the organizations and making sure 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 road blocks 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?

Don Hileman -- Chief Executive Officer

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'll 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 and get a solid base there. But we feel we will be ready in the second half for sure. Our footprint, we are going to look at -- right now, we're a process top of the State of Ohio, in the Pennsylvania, Southern Michigan and Indiana.

I think any of the states, in particular, 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 contiguous opportunities within our footprint to grow the franchise. You're not going to see us jump multiple states or anything like that.

Mike Perito -- KBW -- Analyst

OK. Very helpful. Thank you, guys. And then, just lastly, I appreciate, Gary, all the outlook commentary for 2021.

But if we could kind of summarize it a bit, it's -- 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, it would seem like you expect to remain below 50% in 2021. I'm just curious, what would be -- or what could be some of the in impediments to that occurring as you expect in terms of what the risks of kind of the budget and potentially seeing some upward pressure in the efficiency ratio. What are some of the things we should be mindful of?

Paul Nungester -- Chief Financial Officer

Sure. Yeah. 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. 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.

Mike Perito -- KBW -- Analyst

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

Paul Nungester -- Chief Financial Officer

Yes, yes, yes. And those hires are already in.

Gary Small -- President, Director

Mike, it's 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, that 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 ores in the water that we can make adjustments.

Mike Perito -- KBW -- Analyst

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

Operator

[Operator instructions] The next question comes from Christopher Marinac with Janney. Please go ahead.

Chris Marinac -- Janney Montgomery Scott -- Analyst

Hey, thanks. Good morning, everybody. Just wanted to go 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.

Matt Garrity -- Chief Lending Officer

Sure, Chris. 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 here on mortgage banking.

We think with the decline in refinance activity over the year at an industry level in 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 large S that we enjoyed in 2020, probably is not available for us in 2021.

Chris Marinac -- Janney Montgomery Scott -- Analyst

Got it. That's helpful. And I guess, 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?

Matt Garrity -- Chief Lending Officer

Yes. I would agree with that.

Chris Marinac -- Janney Montgomery Scott -- Analyst

And then, just to follow up --

Gary Small -- President, Director

With the margin offset, we still see production dollars being as high as they were this year, 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 guide. So we'll do it in a different fashion, but we still think we can deliver, to Matt's point, with -- very similar to what we got out in '20.

Chris Marinac -- Janney Montgomery Scott -- Analyst

OK. That's helpful, Gary. Thanks. And just a final point on expenses.

Are there any sort of new investments, digital or other things, beyond just the mortgage, commercial and residential hires that you talked about? And can you sort of pivot from those that need to be to the point of cost containment possibly?

Gary Small -- President, Director

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

Matt Garrity -- Chief Lending Officer

Sure. I would say, Christopher, we absolutely have the ability to fit it 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 we are constantly monitoring if that activity is meeting our expectations and meeting what we've staffed for. And I think we're pretty aggressive about having the right balance between letting things play out versus 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.

Chris Marinac -- Janney Montgomery Scott -- Analyst

Great. Thanks for the additional color. I appreciate it.

Operator

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

Scott Siefers -- Piper Sandler -- Analyst

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 of 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 your core NII guidance?

Paul Nungester -- Chief Financial Officer

Yeah, I think Gary mentioned it earlier. We think we're pretty much near the bottom or very close to it. There will 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 a little bit more.

And we think of it mainly in that core context, excluding marks and PPP, because depending on what happens with the PPP program, with extinguishments and the new Round 2 and things like that that can kind of move it around quite a bit. But we're down in the 3.36% for fourth quarter. So a few more bps down from there isn't unreasonable for '21. But we really think we're at an inflection point where we are starting to -- we'll plateau.

And once we get back into the back half of the year, if loan growth really does come through as we expect, there's opportunity to start to potentially grow from there.

Gary Small -- President, Director

OK. Within the quarter, the trend through the month was declining. So we finished, say, with a better than the quarter as a whole. And while those securities will tip away at core margin, I think slight is the right way to put on it.

Scott Siefers -- Piper Sandler -- Analyst

Terrific. OK. Good. Thank you very much.

Operator

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

Tera Murphy -- Vice President

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

Don Hileman -- Chief Executive Officer

Thank you.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Tera Murphy -- Vice President

Don Hileman -- Chief Executive Officer

Paul Nungester -- Chief Financial Officer

Matt Garrity -- Chief Lending Officer

Gary Small -- President, Director

Scott Siefers -- Piper Sandler -- Analyst

Mike Perito -- KBW -- Analyst

Chris Marinac -- Janney Montgomery Scott -- Analyst

All earnings call transcripts

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