Premier Financial Corp. (PFC) CEO Don Hileman on Q3 2020 Results - Earnings Call Transcript
Premier Financial Corp. (NASDAQ:PFC) Q3 2020 Earnings Conference Call October 21, 2020 11:00 AM ET
Company Participants
Tera Murphy - Vice President
Don Hileman - Chief Executive Officer
Paul Nungester - Chief Financial Officer
Gary Small - President
Matt Garrity - Chief Lending Officer
Vince Liuzzi - Chief Banking Officer
Conference Call Participants
Scott Siefers - Piper Sandler
Michael Perito - KBW
Feddie Strickland - FIG Partners
David Long - Raymond James
Operator
Good morning and welcome to the Premier Financial Corporation Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [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
Thank you. Good morning everyone. And thank you for joining us for today's 2020 third quarter 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 able 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
Thanks Tera, and good morning and welcome to the Premier Financial Corporation third quarter 2020 conference call. Joining me on the call this morning to give more details on our financial performance for the quarter is our CFO, Paul Nungester; as well as Gary Small, our Bank President; Matt Garrity, Chief Lending Officer; and Vince Liuzzi, Chief Banking Officer.
Last night, we issued our 2020 third quarter earnings release. Now we would like to discuss that release and provide insight into the opportunities and challenges for the remainder of 2020. At the conclusion of our remarks, the team will take any questions you might have.
As we continue to navigate through the challenging operating environment, our focus remains on our clients and providing solutions to their needs. We are seeing divergence in the operating environment for different sectors of our client base. The hospitality industry continues to struggle while housing and home sales are strong. All of our associates are working very hard to provide our clients the service and attention they expect from Premier Financial. And I want to thank them all for their efforts and dedication during these very stressful times.
The third quarter continued to be challenging for our economy. We as well as the entire country continue to deal with the impacts of the current COVID-19 pandemic. We are consistently monitoring how it is affecting our clients and our own operations. We expect the economic impacts related to COVID-19 to be with us well into 2021, as the search for a vaccine continues and as baseline consumer confidence builds from a health standpoint. The pandemic and the resulting economic fog is a major concern for all, as we continue to focus on serving the immediate needs of our clients, ensuring the health and wellbeing of our employees and supporting the communities in which we live in and serve. I am very pleased with the strong core performance in the third quarter and the completion of our core conversion in July.
Third quarter 2020 net income on a GAAP basis was $25.7 million or $0.69 per diluted common share compared with $13.2 million or $0.66 per diluted common share in the third quarter of 2019. On a core basis, net income for the quarter was $28.6 million or $0.77 per diluted share.
Pretax pre-provision return on average assets was strong at 1.99% compared to 2.1% for the third quarter of 2019. We've been able to maintain our efficiency ratio below 50% on a core basis with the third quarter at 49.9%. Our provision for loan loss was also in line this quarter with moderating expectations of higher credit losses due to the economic environment.
Net charge-off did elevate slightly this quarter to 24 basis points. However, this was offset by provision for loan losses, which resulted in a net impact of one basis point increase in allowance to 1.63.
Overall, credit quality was generally stable in the quarter with very moderate increases in NPLs and restructured loans. We see this continued improvement in the amount of loans on deferral dropping from 16 at June, quarter ended 9% of the September quarter-end. Matt will have more details on this category in a few minutes.
We continue to be very diligently monitoring and communicating with our loan clients. Ongoing strong levels of activity and gain on sale led to another very strong quarter in the mortgage area. Overall growth in the third quarter was 3.1% for loans and 4.5% for deposits with a shift in the non-interest bearing deposits as a percentage of total deposits as a trend of strong deposit activity continues.
Our overall capital levels are solid and were bolstered by the successful debt offering of $50 million in September. We felt that the environment for the additional tier two capital was present and it was the appropriate opportunity for us to further strengthen our capital stack. We were quite satisfied with the execution of the offering coming in at a 40% rate.
We are also pleased to announce the continuation of our dividend with a 2020 fourth quarter dividend at $0.22 per share flat with a year ago and an annual dividend yield of approximately 4.8%. At quarter-end, we had 570,000 shares of common stock remaining for purchase under our repurchase plan authorization. In these uncertain times, we continue to assess usage of the authorization as well as other capital strategies.
I will now ask Paul to provide details for the quarter before I conclude. Paul?
Paul Nungester
Thank you Don. Good morning everyone. I'll summarize our third quarter results and highlight certain impactful items.
First is the balance sheet. Total loan growth was muted as commercial loan growth was mostly offset by continued shrinkage in residential and consumer lending. We generated $55 million of commercial loan growth, including some additional PPP. Residential loans had very strong origination volumes again, but prepayments and refinancings continuing to drive the net portfolio -- net portfolio reduction. Although, we did have a $48 million increase in loans held for sale.
For deposits, we added another $36 million from June 30 for a 2.5% annualized growth rate. Non-interest deposits declined as businesses began using funds and represented about 23% of total deposits at September 30 versus 25% at June 30.
Next I'll explain the allowance. As previously noted, we did adopt CECL effective January 1, and we've discussed the impact of that on previous calls. For 3Q, the allowance only increased slightly by $363,000 due to provision expense for loans of $3.7 million offset by net charge-offs of $3.3 million. Approximately $4.2 million of gross charge-offs is related to one credit that was a PCD loan from the UCFC acquisition. That loan had a specific reserve established. However, accounting rules require that to be reflected through provision expense rather than a credit against the charge-off. If instead reflected as a credit against charge-off, those would be $0.9 million or seven basis points for 3Q and a net recovery of one basis point on an LTM basis.
The net increase in the allowance is related to an increase in qualitative factors and risk migration offset by improved quantitative factors. Qualitative factors were increased in 3Q again, primarily due to continue concerns for potential future charge-offs. Quantitative factors improved primarily due to a better economic forecast, including a further improve national unemployment forecast. And last while non-PPP volumes only increased slightly, rich migration began to have an impact as we experienced some increases in our special mention and classified balances.
At 9/30, our allowance coverage to total loans was 1.63%, which is up from 1.62% at 6/30. But if you exclude PPP loans, the ratio would be 1.77% from 1.76% at 6/30. In addition, if you include the unamortized balance of accounting marks, the coverage ratio would be 2.04%.
To finish the balance sheet, I'll discuss capital where we ended with $959 million of equity at September 30, up $18 million from June 30, primarily due to continued strong net earnings. At September 30, our tangible equity ratio was 9.2%, and our total risk-based capital is estimated to be about 12.9%. We did complete a very successful capital issuance on 9/30 for $50 million of fixed to floating sub-debt with an initial rate of 4.0%. The lowest this year for a triple B minus Kroll-rated bank holding company. This helped to boost total capital and enhances the holding company's ability to serve as a source of strength to the bank during this economic recession.
Next I will turn to the income statement. I will preface this with noting that year-over-year comparisons are obviously skewed by the fact that we have three months of operations, including UCFC in the third quarter of 2020 compared to none in third quarter of 2019.
I'll start with net interest income, which was $53.3 million for the third quarter of 2020. This resulted in a net interest margin of 3.47%. This does include the benefit of accretion from purchase accounting marks with $1.1 million coming through interest income and $0.8 million coming through interest expense. This also includes $2.7 million of interest income on PPP loans, with an average balance of $440 million.
Excluding the impact of those items, our net interest margin would be 3.41%, which is up from 3.34% on a linked quarter basis. This improvement was attributable to our continued efforts to reduce funding costs, as well as addressing excess liquidity from the significant deposit growth experienced year-to-date.
Non-interest income was $25 million for 3Q and represented almost 32% of total revenues. First mortgage banking income was $12 million for third quarter 2020. Gains on sale on mortgage loans were $13.8 million, up from $11.5 million last quarter, primarily due to pricing along with continued high volumes.
Offsetting those gains were MSR amortization expense of $2 million, fairly consistent with last quarter and a negative valuation adjustment of $1.7 million, which is up from $1.4 million last quarter. Evaluation adjustment was negative again this quarter due to continue to increase prepays speeds. As rates improve and prepay speeds revert to normal levels, we will be able to recover against that valuation allowance.
Next wealth management income came in at $1.5 million, an increased from $0.7 million last year. And insurance commissions were $3.7 million up from $3.3 million last year. Service fees and other charges increased to $4.8 million from $4.0 million last year. And we had $1.4 million of security gains, which I'll discuss more shortly.
Next I'll discuss the expenses. First, we incur $3.7 million in merger related costs in the third quarter of 2020. So cumulatively, we have incurred $34 million to date, and we do not expect much more if any to occur in 4Q since we have largely completed implementation of synergies and the core conversion. So, excluding merger costs, total expenses were $39.9 million compared to $35.6 million in the second quarter of 2020, with the increased primarily due to other expenses and FDIC premiums.
First, we early extinguished $30 million of fixed rate FHLB advances that had a weighted average rate of 2.0% and incurred a prepayment penalty of $1.4 million, which is recognized in other expenses. Separately, we sold $55 million of MBS securities yielding approximately 1.8% at a gain of $1.4 million, thus resulting in no impact to net income.
The proceeds from the sales are being reinvested into securities yielding approximately 1.5% funded by overnight advances with a cost of approximately 20 basis points. The net effect of the transactions is expected to increase pretax income approximately $425,000 over the next 12 months and enhance net interest margin by one basis point.
Next, FDIC insurance premiums were $1.5 million expense in the third quarter of 2020, up from a $411,000 expense in the second quarter of 2020 and a $255,000 credit in the third quarter of 2019.
The increase in expense from prior quarter is largely due to the impact of PPP and includes the year-to-date accrual estimate true up. Although, PPP loan balances are excludable from the asset based component, they are not excludable from the leverage ratio component, because we did not borrow from the PPP LF, plus any loan funds that were in our deposit base would also increase the asset based component. FDIC insurance premiums were a credit of $255,000 in the third quarter of 2019 through the receipt of small bank assessment credits.
So, excluding the merger costs as well as the FHLB prepayment costs since we exclude security gains, we generated a core efficiency ratio of 49.9%, which compares very favorably to 55.5% in the third quarter of 2019. Additionally, our core pretax pre-provision income was $34.7 million, which generated a robust 2.2% return on average assets. We're very pleased with our third quarter operating profitability as we continue to realize our merger benefits.
I'll wrap up with a summary of net earnings. On a GAAP basis, we reported net income of $25.7 million or $0.69 per share. Merger costs this quarter represented $2.9 million on an after-tax basis or $0.08 per share. Excluding those costs, core earnings were $28.6 million or $0.77 per share.
In conclusion, we had another strong quarter as we completed our core conversion and near final implementation of synergies. Our healthy capital levels and sturdy operating profitability remain a solid foundation in the current recessionary environment.
That completes my financial review. And I'll now turn the call over to Gary for highlights on our community banking initiative, merger integration progress, and continued COVID impact. Gary?
Gary Small
Thanks, Paul and hello to all. We certainly had a terrific performance quarter and I'll provide a few comments that will give some additional color.
We are 90 days post our integration date, which was July 13. And again, an MOU or -- excuse me -- an MOE combination is a large undertaking and we're very pleased to report as a successful effort, and we're now in the stage of typical cleanup and adjustment activities and those continue today. We see that we'll wind down those efforts over the next few weeks.
Work will continue on operational improvement initiatives that we have slated over the next few months, with our goal to optimize our resources and provide the very best client experience possible. You might note that deposit related non-interest income was down a bit for the quarter versus the norm. There were fee grace periods and liberal fee wave activity for clients that were affected by the integration, which was the movement between the two core systems of their accounts. Fee income is returning to normal levels as we enter into Q4 positive fee income that is.
We have also discontinued select points programs et cetera, resetting our fee income base and that's a more permanent effect. Those fee reductions are more than offset by the corresponding expense reductions related to the costs of administering those programs.
From a business perspective, regardless of the uncertainty created by COVID and the near term election cycle, each of our business units are in a -- on a good pace as we go into Q4. Our residential mortgage business continues its excellent year and we expect to carryover effect at least into early 2021. The commercial activity is stronger than might be expected under the circumstances. Although, pipelines are understandably a bit less than normal.
Across the retail shop were returning to a more business as usual mode with sales campaigns underway in home equities investments and small business services. And we're getting excellent early -- initial activity results.
And I wouldn't want to say that our insurance and our wealth management businesses continue to post strong results at all of these fee businesses it's worth remembering are big enough to matter and provide a very diverse revenue stream for the organization adding to some of the resilience of our performance.
Margin management is always top of mind and it's evidenced by the end of the third quarter's rapid decline in our overall cost of funding. Competitors are flush with cash and there's little promotional activities in the market. And we've seen our funding costs drop by as much as five basis points within a single month period. We'll continue to manage deposit pricing very closely. And we expect us to see a continuation of this lowering theme over the next couple quarters. Regarding loan yields, we continue to use floors and have deemphasized swap activity for the foreseeable future in an effort to protect our yield.
In terms of delivery channel activity, we have recently announced the closing of three branch locations effect in the first quarter of 2021. COVID-19 had certainly affected how our clients interact with us from a brick and mortar perspective. Consistent with past efforts, we continue to look for opportunities to realign our resources and better enable us to do business with the customer in their space and responding to their service preferences.
A comment on credit. We see delinquency is trending upward with in a very measured pace. We closed Q3 at approximately 90 basis points. Commercial reflected no meaningful change from our Q1 levels, and consumer and residential levels are up, but steadily increasing, but remaining very -- at very manageable levels. We keep a close eye on the migration and we're generally very pleased with where we stand.
Final thought. We continued to build a business model in the fashion that we will deliver a strong operating leverage over time. This approach builds better performance resiliency under almost all market conditions. It's worked for us to this point, and you should expect no change going forward.
With that, I'll turn it over to Matt.
Matt Garrity
Thanks, Gary. I'd like to update you this morning on the return to pay activity of our borrowers that had received payment accommodation as a result of the COVID-19 pandemic, comments on our portfolio performance for the quarter and our thoughts on asset quality moving forward.
With respect to payment deferral activity during the third quarter, we're pleased to report the total loan deferrals declined by approximately 41% as borrowers returned to payment. We saw approximately 76.4% of third quarter expiring deferrals returning to payment.
As we discussed on last quarter's call, October is our largest month of expiring payment deferrals. And as of Monday, our returned to pay percentage is tracking to what we experienced for the third quarter. This should put us in the mid-single-digits by the end of the month.
I would note that our reduction in deferred loans was also seen in our high sensitivity portfolios. Balances under deferral reduced over 33% in our accommodation and food service category, over 48% in our retail trade category, and over 58% in our long-term care category.
As outlined in our earnings release, we also saw some extension of deferrals during the quarter, but these extensions largely represent maturing 90-day deferrals that were deferred for an additional 90 days.
On the consumer side, mortgage portfolio deferrals were approximately 3.6%, which compares very favorably to the national average of over 6.8%. In terms of portfolio performance during the quarter, I would characterize it as in line with our expectations and consistent with what we communicated previously. We did see asset quality migration as expected during the quarter, but the migration during the quarter was largely contained in our hotel segment. The remaining portfolio remained relatively stable during the third quarter. Our expectation is that while performance continues to improve slowly in the hotel segment, that several of these borrowers will require additional support while they continue to recover.
In terms of the asset quality migration we did see during the quarter much of the hotel segment migration was to the special mention category with one, $4.9 million hotel loan moving to substandard. While we do expect further migration in this segment, I would note that by design, the hotel portfolio represents a relatively small segment of our overall loan portfolio at 2.8% of total loans. We continue to monitor the performance of this portfolio and our entire loan portfolio closely.
As Paul mentioned in his remarks, we had net charge-offs of $3.3 million for the third quarter from an individual loan that had a specific reserve established. I would not characterize the charge-off as being completely COVID-19 driven as it had previously been identified as having performance issues and having had a mark established against the loan at the time of merger. The loan was in the retail portfolio and we believe the remaining balance is appropriately reserved for.
Our overall outlook for asset quality remains unchanged from our comments last quarter is there remains a high level of uncertainty. We believe continued economic recovery remains reliant on the duration of the pandemic, vaccine development and what future economic stimulus looks like.
So far, the impact of the pandemic has been uneven across customer segment, with businesses and consumers tied to more contact dependent segments under greater duress than those that are not. Our team continues to stay close to our customers and monitor performance.
In spite of the challenging environment, we were well-positioned entering the cycle, given our strong asset quality position, strong balance sheet bolstered further during the quarter with our successful sub-debt raise and a strong risk management team in place. We also believe that our borrowers have come into this cycle stronger overall than in prior cycles. While we fully expect continued asset quality migration and additional credit losses in future quarters during the cycle, we believe we are well-positioned to see it through.
I'd now like to turn the call back over to Don for closing remarks. Don?
Don Hileman
Thank you, Matt. While the future will continue to bring challenges for the company, I believe that we as a company have worked hard to position ourselves to proactively address these challenges. As noted credit challenges and the uncertainty related to the credit environment continue to develop, and we expected to be at least several quarters until we see that playing out with more clarity.
We believe we have a consistent progress in our execution of the merger and integration, as noted allowing us to shift our focus to the future. The dedication and teamwork of our employees have proven that our power by people philosophy is a driving factor behind our success.
I am so proud of their commitment to our clients and communities during this challenging time. We appreciate the trust you have placed in us. And thank you for joining us and for your interest in Premier Financial Corp. We will now be glad to take any questions.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]
The first question will come from Scott Siefers of Piper Sandler.
Scott Siefers
Good morning, guys. Thanks for taking my questions.
Don Hileman
Good morning, Scott.
Scott Siefers
Hey, let's see. I think first question I wanted to ask is just within the hotel portfolio. When you talk that about the need for additional support for some borrowers in that portfolio, what do you mean by that? Like how are you contemplating working those out? Are those just as simple as extensions of deferrals, or are we talking stuff more substantial than that?
Don Hileman
Scott, it’s really just extension of deferrals, consistent with some of the regulatory guidance that came out recently, really encouraging. Banks to continue to support these clients that are impacted by COVID. We've taken the approach to continue to assist those. Although, I would say for those hotel loans and really any of our deferred borrowers that need additional assistance, we're really approaching it with a little bit more of a value exchange this time around. So, we will be thinking about enhancements, be the economic or structural with collateral or increases in recourse, things of that nature.
But we do expect that particularly in this hotel segment and thankfully it's relatively small compared to the overall portfolio, that we're going to need to continue to support these folks for a little while longer.
Scott Siefers
Okay. Perfect. Thank you. And then maybe a question for Paul. So, the core margin, when we back out all the noise, I was surprised by how well it held up. Just curious if you can give us maybe a little more color on the puts and takes you see them and sort of where it goes from here.
Paul Nungester
Yeah. So, a couple of things there. Part of it is a little bit of pickup from what I described earlier during the prepared remarks about the restructuring transaction we did, we've been able to take some liquidity, get rid of borrowings for the most part. In addition, we did get active in the third quarter here, ramping up some security investments.
So, just as we were an issuer, we were also a buyer on that front buying some sub-debts and other securities as well as the normal stuff. But given we had that, that ability because of the strong deposit growth, which came in surprisingly strong in the second quarter and was dragged in them, we obviously put that to work as best we could and that helped prop things up there.
Scott Siefers
Okay. Perfect. And then, just as you look forward, is it -- we able overall to support that sort of the current level?
Paul Nungester
Yeah. Yeah. We think absent any additional shacks of the system here, we think we've -- for the most part hit a trough at the three fours level. Most of our loan portfolio, especially the variable stuff is already rolled down. We will continue to get a little more compression on there as our five-year arm portfolio comes up for those resets and whatnot. But we've been beaten down funding costs very strongly CDs, especially, which will continue to turn.
And we've got a little bit more opportunity. We've still got some higher costs deposit funds out there, certain money markets and private banking and things like that, that we could look at if needed to continue to bring that down over time.
Scott Siefers
All right. Perfect. Thank you very much.
Paul Nungester
Yeah.
Operator
The next question is from Michael Perito of KBW.
Michael Perito
Hey guys. How's everybody?
Don Hileman
Good. Good.
Michael Perito
Good to hear. First question for Matt. The commercial loan balances, ex-PPP, at least as it would seem to me from the financials have seen some steady, not quite as robust as it was, but steady growth. And I'm just curious how the market for commercial loan growth looks today as you guys see from a credit risk appetite standpoint, from a pricing standpoint, from a competition standpoint, I mean, is there some conference that as we move into next year here that you can continue to drive, maybe even see some acceleration of commercial loan growth, organic commercial loan growth.
Matt Garrity
Sure. Mike, it's still a very competitive market. I would characterize our activity in our commercial bank as being solid and some good growth in the third quarter. But I wouldn't obviously characterize it as that kind of growth that really either institution has experienced historically over the last couple of years. But the growth is there, a fair amount of growth in Q3. I think as we get into Q4, I would expect a similar amount of growth, what will impact us in Q4 is some pretty strong payoff activity. These are planned payoffs, people going out in a permanent market. But in spite of that, we'll see some growth.
Our aspirations for 2021 will includes loan growth in the commercial portfolio. But again, I wouldn't say it's going to be to the robust levels that both organizations enjoy historically pre-pandemic, pre-COVID, but we've got a really solid team out there, looking for the right deals. Credit philosophy and how we operate in this market, I think both institutions were relatively conservative and had a fairly well-defined set of goalposts over what deals make sense and which ones don't. So, one of the things that we bring to market is some consistency there.
Clearly, we will probably be asking a few more questions because of what's going on with COVID and the questions that those raised, but we haven't -- so, we haven't pulled our oars in either. We'll still look to grow this portfolio next year.
Gary Small
Mike, this is Gary. As additional evidence on that, in the last quarter we've added five commercial bankers from some strong competitors. We're in the mood for selective growth and adding talented folks to the team to get it done.
Michael Perito
Helpful, guys. Thanks. And then on the mortgage side, as we look out to the next quarter or two here, I mean, can you help us just balance with some historical seasonal trends versus what's clearly some environmental elevated activity here, and how we should think about that units production near term?
Matt Garrity
Mike, this is Matt. We've got a very strong pipeline going into -- to Q4. As we saw production on the refi side dial down a little bit. It was really backfilled nicely with purchase and construction perm activity. So, we think our Q4 is going to be pretty solid. And we've been pretty transparent that we're enjoying some really outsized margins, because of -- as we reach capacity internally, in turn we're pricing up a little bit in reflection of that, that clearly won't last forever. It won't last with us all through 2021 for example, but we do feel that, this expanded profitability that we're experiencing relative to what both banks would have seen in the norms will be with us during Q3 and will bleed into Q1 next year as well.
Michael Perito
Helpful, Matt. Thank you. And then just last for me. Gary, you mentioned the three branches that you guys just closed and the changing kind of customer preference that you've seen during the pandemic. I'm just curious, how do you see Premier in terms of evolving its delivery methods of products and services, how far along do you guys see yourselves today? I mean, with the three branch closures, just kind of the initial stuff that stood out and there's more ongoing or do you feel like the combined footprint is now somewhat right-sized, I guess I'll stop there.
Gary Small
I'll unpack that a bit. The three branches that we announced, two are pure consolidations and given the transaction levels and the market movement, easy to do once a little less of a pure consolidation. We're not exiting the market, but it's not as easy as just being down the road. And they've been on the board for some time. Both organizations historically had selectively pruned the branch compliment on a pretty recurrent basis.
So, I don't expect we're going to have the big shock announcement of 25% of our locations going down in a year or anything like that. When you look at the branch component that we have now, there continues to be some potential opportunities there, but again, I wouldn't expect a large announcement like that. I'll ask Vince to comment a little bit on the network as a whole.
Vince Liuzzi
Sure. Thank you, Gary. I would just also remind everybody that as part of our prudent distribution management program, we're also looking at opportunities where we do see growth. I'll remind everybody I think in the second quarter we announced the opening of our branch in Columbus. And so as we're constantly looking at the retail network and opportunities that we've got to optimize and meet customers when, where, and how they want to interact with the bank, you'll see more focused, not just around retail branch distribution, but around our digital strategy and our ability to connect with customers digitally.
And so, I would just remark that this is really a function of an ongoing optimization retail distribution strategy program that helps us make the decisions to meet the customer need and demand.
Gary Small
It speaks to my comments earlier, Mike, relative to realigning the resources. And if you were to look into our strategic plan, as it stands today, you would see significant dollars going into the digital space, channel and all things digital, and you'd see a trimming of commitment in some of our more traditional channel support. They'll continue to be what they need to be, but priority wise, we move into that digital space.
Michael Perito
And as we think about the expense outlook from here, do you -- it sounds like your NIM actually relatively is going to be pretty resilient here, but still a difficult rate environment. You have the mortgage offset, which certainly helps, but I imagine there's not a huge appetite to grow expenses in a significant way in this environment. I mean, do you feel like you're on the trajectory where these digital enhancements and upgrades that you're making to your platform are at a point where efficiencies that they generate and potential as you scale can limit the upfront negative impact to your expense growth as you kind of move along this path.
Gary Small
I don't know if it will be a one for one in the year of spend, but over a reasonable period of time, you can expect that you'd get your earn back in terms of other physical delivery methods and support and processes, because a lot of digital is process improvement and just efficiency and customer acquisition expense. So, it may not be within the year of spend, but that's certainly the goal. It's -- a lot of activity and I think traditionally in banking, as we've expanded our channels that you incur new costs, and again, you either optimize or get the opportunity to exit some old delivery methodologies. And you tend to see a net benefit to the bottom line with the technology coming on board.
Michael Perito
Okay. Helpful. Interesting discussion. Thank you guys for taking my questions. Stay well.
Gary Small
You're welcome.
Operator
The next question will be from Feddie Strickland of FIG Partners.
Feddie Strickland
Hey, good morning guys.
Don Hileman
Hey, good morning.
Feddie Strickland
So, just a question on the merger discount, it was a little less than $15 million at June 30. Is the approximately $1 million of accretion, a direct reduction of the mark? Should we be thinking that's around $13.5 million now? Or what was that number?
Paul Nungester
Yeah. The accretion on the asset size of the loan -- the net of loan and securities was the $1 million. Yes. Can you clarify what you're talking about on the discount side?
Feddie Strickland
Yeah. Just like when we're -- when we're trying to look at reserves plus the credit mark, is that credit mark now like $13.5 million?
Paul Nungester
Yes. Yes. I gotcha. Yes.
Feddie Strickland
Gotcha. Sorry, I just phrased it.
Paul Nungester
No. That's okay. I thought you were talking dollars. You are correct. Yes. Yes.
Feddie Strickland
Okay. And then one follow-up for me. You guys had a great 2020 pretax pre-provision ROA this quarter. Do you guys see that as being sustainable? And do you think you can expand it into 2021?
Don Hileman
I think it's going to -- this is Don, Feddie. I think it's realistic to expect that we can target this level, whether we can expand on that level with some of the headwinds and some of the additional items we anticipate will be a challenge. But clearly we're focused on the things that we just talked about. But I think any kind of a significant expansion would probably not be what we're looking for in that ratio.
Feddie Strickland
Got it. Thanks so much. Thanks for taking my questions guys.
Don Hileman
You are welcome. Thank you.
Operator
The next question will be from David Long of Raymond James.
David Long
Good morning, everyone.
Don Hileman
Good morning.
David Long
At the beginning of the call you talked about your qualitative versus your quantitative part of the reserve and curious on the qualitative side, what are your assumptions baked into your reserves today on the next stimulus package?
Paul Nungester
Well, we do believe that there's obviously the possibility of it, but given the current political environment, we're not putting a whole lot of credence in it just yet. That's something that we'll hopefully clarify here in the fourth quarter. Post-election, we'll get a lot more visibility into that, but while we see it as a possibility, it would certainly be beneficial. We're not going to put a lot of weight into that at this point.
David Long
Okay. Got it. And then in response to Scott's question earlier, you mentioned purchasing securities, and I thought you mentioned sub-debt. So just curious, are you guys issued sub-debt but are you buying other banks sub-debt in your securities portfolio at this point?
Paul Nungester
Yes. Yes. We are. It's -- on a alternative investment, it's a better yield than some of the traditional stuff that we get. So, it helps from that perspective. It also helps with some durations and things like that.
Don Hileman
We put some -- this is Don. We put some fences around how much of that we have an appetite for. And we're generally going to be looking for companies we know and understand rather than just any kind of sub-debt to purchase. So, I think we all have a pretty high quality portfolio of that on our books here as we move forward through the quarter.
David Long
Got it. Okay. Thanks. And then lastly, the PPP loans and the timing of forgiveness there, have you started to take applications for forgiveness, and how are you thinking about the timing on your customers going through that process?
Don Hileman
So, I'll let Matt answer that one for you.
Matt Garrity
Sure. We've -- to your first question, we've seen very little activity on forgiveness, really just hand -- literally handfuls of clients that want to go through the process. I think the lion's share of our client base has been anticipating what comes next out of Washington. What modifications or what happens to the forgiveness process is part of a future stimulus package. So, I think that's a bit of a gating issue right now and to the extent of the timing of that additional -- getting that stimulus rolled out that might be the accelerant that we need. But our thinking is that this gets -- more of this -- where of this forgiveness really gets pushed out into early 2021 and into Q1.
David Long
Got it. Thanks for taking my questions guys.
Don Hileman
Thank you.
Operator
[Operator Instructions]
The next question is a follow-up from Scott Siefers of Piper Sandler.
Scott Siefers
Hi, guys. Thanks for taking the question. Just wanting to talk about mortgage. I mean, for you guys and for everyone in the industry, it's just been so shockingly strong. I'm curious about sort of where and when you guys think it all begins to settle out. I mean, just based on where rates are, I would imagine it has some legs for a while, but whether it's a gain on sale margin normalization, how much refi is really left. How are you guys thinking about those dynamics?
Matt Garrity
The margin will -- this is Matt, Scott. The margin will start to normalize as we get into really Q2 through Q4 of 2021. That's our thought process, at least for now. Although, the mortgage business is pretty dynamic, I don't think anyone would have expected the kind of mortgage activity that we've experienced this year.
I think what's a little bit unique about our model that we probably need to remember is and it sort of gets to the comment I made a moment ago where we've seen as that refi activity is declined, we've seen a nice refill of that decline from our purchase and construction firm business. Strategically, we view mortgage as a business that we can continue to grow. So, while 20 -- our expectations for 2021 as well we won't see the robust refinance activity. We also don't feel like that we're going to drop right back off either. We feel that there's opportunities for us to continue to expand this business, both within the markets we're in and probably within some contiguous markets as well. We're keeping our eyes open for that.
So, kind of a long answer to margins normalizing. Yes. I mean, we will definitely see that in 2021. But I wouldn't necessarily call for a full drop-off in volume as a result of the reduced refinance activity next year. We think we've got a few different oars in the water there.
Scott Siefers
Perfect.
Paul Nungester
Scott, it's kind of counterintuitive, but if rates stayed as they are today and pricing did normalize, I think we see another refinance boom. There's probably not just for us, but our competition five eights to three quarters of a percent difference between a 15-year refi at a purchase or a purchase money. Those usually don't have that kind of gap. So again, if rates stays as they are, pricing will come back into line as volumes sort of slips away and there will be a new type of volume, and it'll be the refi at that much lower rate versus that already good rate that they might've experienced. There's enough vig [ph] in there. We could see another volume boost next year.
Scott Siefers
Yeah. That's a good point. Okay. Perfect. Thank you, guys.
Don Hileman
Thank you.
Operator
And this concludes our question-and-answer session. I would now like to turn the conference back over to Tera Murphy for any closing remarks.
Tera Murphy
Thank you for joining us today as we discussed our quarterly results. We appreciate your time and interest in Premier Financial Corp. Have a great day.
Operator
Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect. Have a great day.
