Primis Financial Corp (FRST) 2023 Q2 法說會逐字稿

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Primis Financial Corp., second-quarter earnings call. Today's conference is being recorded. (Operator Instructions)

Matthew Switzer, Chief Financial Officer, you may begin your conference.

Good morning, and thank you for joining us. Before we begin, please note that many of our comments during this call will be forward-looking statements, which involve risk and uncertainty. There are many factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements.

Further discussion of the company's risk factors and other important information regarding our forward-looking statements are part of our recent filings with the Securities and Exchange Commission, including our recently filed earnings release, which has also been posted to the Investor Relations section of our corporate website, primisbank.com. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes to future operating results over time.

In addition, some of the financial measures that we may discuss this morning are non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measures can be found in our earnings release.

I will now turn the call over to our President and Chief Executive Officer, Dennis Zember.

Thank you, Matt, and thank you to all of you that have joined our second-quarter conference call. I know this is a noisy quarter, but I really want to stress how excited I am for how we positioned the bank going forward.

The cost savings initiative is pretty hard but will make us much leaner and more profitable right away. The credit charge to move NPAs position us to have best-in-class credit quality with tiny concentrations in office or retail CRE. Our digital platform has gone from 50 basis points over wholesale money to about 50 basis points below wholesale money in just six months. And lastly, while a lot of the industry is implementing the needed cost savings and branch reductions to offset revenue headwinds, I think we can offset all of ours with our move to the gain on sale strategy.

Let me give a little more color on all of that. First, the cost savings initiative. Since I came here in 2020, we have consolidated quite a few branches and worked pretty hard on the sales culture. After this recent consolidation is finished, we'll have 24 branches, with core bank deposits of $2.5 billion.

In the last three years, we've grown checking accounts in the core bank by about 12% annualized, and we have completely, 100%, run away from all brokered CDs. The quality and value of this community bank's deposit portfolio, especially in this rate environment, has never been higher than it is right now. And consolidating that value into fewer branches with the best salespeople in our region is something to be excited about.

Matt's going to give more color about the cost savings initiative in his remarks, but I believe this can be a transformative moment for us. And I have seen over and over in my career how this discipline ultimately yields more savings and, long term, better results.

Still on the value of the community bank, our NPA levels were concentrated in just two relationships, but it still damaged our ability to distinguish ourselves. Focusing on -- excuse me, so closing that one loan sale that we did in the quarter and taking contracts on the other has positioned us to have only 13 basis points of non-performing assets.

We have never chased long maturity, hypercompetitive commercial real estate in our region. We've always focused on profitable, owner-occupied, or C&I deals in the core bank and medical professionals and cash secured loans in the lines of business. I think we're very well positioned for whatever is ahead, and this lower level of NPA will allow us to experience the value from that.

On the digital platform, we all questioned, at the outset honestly, if we could find the pathway to real value and profitability in the digital customers. And we are working very hard to make sure that value proposition becomes a reality using all of the community bank and relationship skills that we have. In just six months, we've been able to add -- to be able to move almost 100 basis points from 50 basis points ahead, to 50 basis points below wholesale money.

Lastly, we've had virtually no account attrition from our peak. And we've rebuilt almost every service platform we have to make sure our service and experience adds to our efforts.

Touching on our gain on sale -- our pivot to the gain-on-sale model. Our digital platform was meant to fully fund life premium finance and Panacea and produce 325 basis points of margin. The loan businesses were meant to lessen -- we went into the loan businesses simply to lessen the pressure we had to book every CRE deal that we looked at and to push higher-quality credits into our book.

There is no question we have done the latter, but the inverted yield curve means that, on balance sheet, we're only getting about 200 to 210 basis points of incremental margin. I know that's too thin to keep leveraging, but I also know the yield curve will ultimately come back.

And instead of shutting down production and waiting and having to maybe rebuild the platforms, we've been instead building interest and commitments to sell these higher-quality loans. And as I sit here, right, now, I believe this strategy can completely neutralize all of the net interest income shrinkage that we experienced in the quarter. Which is important because I think that means the cost savings that Matt's going to discuss about are more bottom-line oriented than just replacement for temporary revenue declines.

Mortgage for us this quarter was a standout. Right now, we are slowly and methodically adding a couple producers here and there who are very reasonable about signing bonuses and have been producing solid levels in this environment. We've grown from a $200 million shop to a $700 million shop, and we're profitable all three months in the second quarter.

Being profitable right now in this industry is -- honestly, it's noteworthy. But doing it as you're growing and at these lower levels is even more noteworthy. And I'm really proud of what our team is doing here. And I cannot wait for the day that we have an industry -- a normal industry, to operate here.

All of that takes me to page 5 in our slide deck, where Matt has outlined the current quarter with the impact of all these changes. Importantly, our non-branch savings have already been completed as of this month. So a good portion of that will be in our third-quarter run rate.

What the math doesn't include is about $800,000 a quarter of expenses related to bank operations that will result from tweaking some responsibilities and risk management. And we honestly both believe this loan sale strategy is bigger than $1 million. With that loan sale strategy in place, the provisioning will fall as well, further improving the bottom line. So everything we've done here is just recalibrating the bank to be able to produce a minimum of 1% ROA in this environment.

Before I turn it back over to Matt, I want to say something about the employee fraud. First, I want to stress that I am confident that the vast majority of this is coming back from our insurance. But given the timing of when we discovered it and our investigation, we did not book that receivable. I believe in short order, there will be only minimal financial impact from this event. God knows I am not trying to spin this.

But the fact that he spent a decade originating fake loans and stock, three years ago, illustrates how important good controls and procedures are and for the need to have experts in administrative roles to maintain quality. For the last three years, he's basically just serviced the existing fraudulent loans with cash proceeds until our credit and regional staff noticed a few unusual things and dug in to discover this.

I expect that Matt and our forensic accountant will be done with their work shortly. We'll file the claim and work through the recovery process quickly.

All right. With that, Matt, I'll turn it back to you.

Thank you, Dennis. I will provide a brief overview of our results before we turn to Q&A. But as a reminder, a full description of our second-quarter results can be found in our earnings release and second-quarter earnings presentation, both of which can be found on our website.

Operating earnings for the second quarter were $1 million, or $0.04 per diluted share, versus $6 million or $0.24 per diluted share in the first quarter. Total assets were $3.8 billion at June 30 versus $4.2 billion in March 31. The reduction in total assets was due to the sweep program we instituted at the end of the quarter that moved approximately $350 million of excess deposits off the balance sheet at the end of the quarter.

Excluding PPP loans and loans held for sale, loan balances grew 17%, annualized. Growth was driven by life premium finance and Panacea in the second quarter. We anticipate loan growth to moderate in the near term, as we execute on our loan sales strategy, particularly for our higher-growth business lines.

Deposits were essentially flat in Q2, if you include the funds that were swept off the balance sheet at June 30. We intend to continue growing deposit relationships while managing overall liquidity through the sweep program.

Excluding accounting adjustments related to third-party managed portfolio, net interest income declined to $25.6 million from $27.5 million in Q1 largely due to funding cost pressures. And interest margin, adjusted for excess cash on the balance sheet, in Q2 and Q1 that is now being swept off was 3%, down from 3.38% in the first quarter.

A couple of thoughts on margin and net interest income. Pressure on the margin largely occurred earlier in the second quarter, with a noticeable slowdown in deposit repricing later in the quarter.

As you look at our press release and investor presentation, we detailed the difference in cost between the community bank and the digital platform. Our community bank beta has been approximately 23%, which we believe is very strong. Having an ability to raise incremental funds out of market has allowed us to be measured in our local markets without pressuring the entire bank.

We also will be launching our new digital business accounts in the third quarter that will allow us to raise incremental funds at a lower rate than consumer and sweep off higher cost deposits still on the balance sheet. Lastly, we entered into an interest rate swap in the middle of the second quarter. If in place for the whole quarter, net interest income would have been approximately $300,000 higher.

Combined, we think we have an opportunity to mitigate a lot of the pressure on net interest income in the short term. Excluding accounting adjustments, non-interest income was $7.3 million in the second quarter versus $6.6 million for the first quarter, largely due to an increase in mortgage activity.

Mortgage originations were up 50% in the quarter in the face of limited housing supply. The locked pipeline also ended Q2 at $61 million, up 15% from March 31, suggesting strong momentum into the third quarter.

Lastly, non-interest income included a gain of $103,000 from a small Panacea loan sale. We expect this activity to increase materially in the second half of 2023.

Core non-interest expense, excluding accounting adjustments, non-recurring items and mortgage was $23.5 million for the second quarter versus $21.5 million in the previous quarter. Much of this increase was due to FDIC insurance, data processing expense, and debit card restocking costs that totaled approximately $2 million in the quarter. And they were artificially high due to the high volume of accounts opened late in Q1, early Q2. FDIC insurance, in particular, will decline due to the deposit sweep program.

Dennis also discussed a variety of operational changes that will benefit expenses going forward. We also announced a cost save initiative, including broader administrative reductions and the consolidation of eight branches that will reduce non-interest expense by approximately $9.4 million annually.

Annual administrative saves are approximately $6.5 million, with two-thirds of the run rate expected to be in the third quarter and full run rate in the fourth quarter. Annual branch consolidation saves are expected to be $2.9 million and will be effective starting October 31.

The provision for credit losses was $4.3 million in the second quarter versus $5.2 million in the first quarter. $1.4 million of that provision was due to accounting for our third-party managed portfolio, which is offset by non-interest income. Also included in the provision is approximately $2.3 million of impairments related to non-performing loan relationship that we expect to be fully resolved in the third quarter.

As Dennis highlighted, including an approximately $8 million NPA resolution in the second quarter, total NPAs would have been less than $6 million, and NPAs to assets would have been very low at approximately 13 basis points as of June 30. Core net charge-offs were only $200,000 in the quarter, and the allowance for credit losses to gross loans, excluding PPP, was 1.21% at June 30 versus 1.18% last quarter, largely due to specific reserve build for the NPA sale noted above.

Lastly, core pre-tax, pre-provision earnings were $5.6 million in the second quarter after a $2 million reduction in net interest income and various expenses that hit this quarter as discussed above but that we expect to be lower going forward. As Dennis discussed, we believe our gain on sale strategy is on the cusp of producing results and will mitigate this reduction in net interest income and income.

Our cost save initiatives will also begin adding to earnings in Q3 and Q4, and we'll rightsize our expense base for the current environment. Combined, we believe we have a much better path to profitability than this quarter would indicate and are optimistic for the future.

Operator, we can now open the line for Q&A.

Thank you. (Operator Instructions) Casey Whitman, Piper Sandler.

Hey. Good morning.

Morning.

Morning, Casey.

Just starting off with your comments around the gain on sale model loan growth. Could we see loan balances shrink or are we just talking about slowing the growth here?

I don't think they would shrink. I think there's -- everything that Panacea and life premium would produce would get sold. I think the vast majority would, but I think Panacea's consumer production, we like that. I don't think that we're looking to sell that. I do know that the activity in the core bank, honestly, has picked up a little.

What we're able to do in the core bank, the fact that we even can loan money distinguishes us. And some of the yields we're seeing are in the mid-eights and nines. So I think probably just concentrating more of our lending efforts there, probably just see single digits or low-single-digit increases in loans as opposed to what you saw this quarter.

I assume you can be pretty nimble there. I mean, how quickly can you shut this off if the yield curve changes and you want a portfolio more?

I think very fast. I mean, really, what we're talking about is more flow arrangements and flow agreements. So I mean, we would want to honor that, honestly. But Panacea is probably only producing 40%, 50% of what they could produce just because of how hard we dialed them back. We've not been recruiting producers.

I think if we get good flowing arrangements in place, we could hire more producers, produce more, and really exhaust the name that they built for themselves. I just feel like this yield curve and incremental funding for us -- and honestly, our limited capital -- we're not going to burn off all of our capital on that -- has made us sort of slow down there. So really this is such a welcome -- this is a very welcome move for Panacea and probably what they can do. They might be able to double production levels if we get -- when we start getting these in place.

Okay. But maybe just start out with the -- I think it was $1 million assumption for the gain on sale that you have in your slide deck, and we'll go from there.

I would probably start with that. I think we -- yeah, we would start with there. We're confident that we can do more. But I think for this quarter, that's probably a good number.

Okay. And then just the cost initiatives you're undertaking. It sounds like at least some of that was driven by the rate environment. Or would you probably have made these moves regardless, but you just has accelerated the efforts? Just walk us through how you came to these decisions.

Matt, I need you to chime in. I mean, I think every single day, Matt and I come to work, and we look at what's happening, and we calibrate a pathway to the profitability levels we want. And I mean, it's been decades really since the industry faced 10% declines in net interest income in a single quarter.

Honestly, I think all that's going to moderate. I bet you a year from now, if rates stay like this, we'll be getting some of that back. But it doesn't matter. Right now, the industry has got net interest income headwinds. If you can't even conceivably grow through that -- and it was just the right time to do it.

I mean, we needed to consolidate some branches for years. The opportunity to consolidate our management team and other positions is -- every chance that we have to -- I mean, Matt and I are not always looking for cost savings and to reduce staff levels. We're not. But every chance we have to strengthen our staffing levels and our pathway to profitability -- we're going to take every pathway we can.

And honestly, through the quarter, probably going into the second quarter really, we just look. It's going to be tougher to push a 1% ROA if we have a little shrinkage in net interest income, if we don't fix -- if we don't build confidence into credit quality with non-performers, a host of that. That's, I think -- what would you?

No, I completely -- we, as Dennis said, are always looking for efficiencies. But probably more critical in this environment, particularly as we're trying to not grow the balance sheet as aggressively as we have been. But you can carry higher expenses if you're growing the balance sheet, grow and spread income. But in this environment, that's more challenging. And I want to make sure we get the right expense base for the size of balance sheet we're going to have in the near term.

Yeah. Ultimately, do you think 24 is the right branch network size? Could we see more branch reductions in the future? Or --

I mean, never say never. It's going to depend on, to a certain extent, the environment and consumer behavior. But I think we feel pretty good with the number of branches we have for right now. You'll see incremental overtime, but I don't think you'll see another large consolidation like we just did.

I mean, I would say, too, we don't talk about this that much. But I mean, we're adding probably $25 million a quarter to our delivery service -- V1BE, our delivery service. And a lot of -- some of that is out of our core network, but a lot of it is not. We're adding millions in places that we are kind of close to, but not right on top of.

So I mean, we would, for sure, add more branches in larger markets around where we are in, say, Norfolk and Virginia Beach and all that. But for right now, we are -- that's not on our radar.

Okay. Maybe -- can you help us out then in terms of where -- or give us a quarterly range for where you expect expenses to run when all is said and done with the cost saves? It can be a wide range, but just to help us out in modeling.

Yeah. I think -- I mean, obviously, this won't all be in the run rate until later this year, but probably in the $18 million to $18.5 million, excluding mortgage, which -- obviously, mortgage fluctuates pretty dramatically based on seasonality. But the core run rate would be in that lower $18 million range.

Okay. Thank you for taking my questions. I'll let someone else jump on.

Russell Gunther, Stephens.

Hey, good morning, guys.

Morning.

I wanted to follow up on the gain on sale model discussion and just get your thoughts about how you see that maturing as we look into '24 and the 1% ROA bogey. I hear you on the near-term gain on sale expectations. But how do you think that scales as we move forward?

I mean, Panacea has produced, what, [45] this quarter. I think Panacea did 45 in commercial. Matt's going to look it up. I think Panacea could -- there's no question in my mind. They could hire -- we could hire two or three more bankers and probably maybe even double that.

So now, finding buyers for all that, I think we've got a quite a few lined up and several that are nearing the very end. Payment fees, commercial production, on a floating rate basis is kind of right on top of prime. And so these are high-quality commercial loans to medical professionals with strong credit metrics any way you look at it.

So I mean, yeah, I think there's a lot of interest in this.

They originated about $75 million in the quarter, a little less than half of that actually funded in the quarter.

Okay. So $75 million in the quarter. I mean, it's a good problem to have, having something this robust. But it's just -- so I think it's a good opportunity -- I think it's a real good opportunity for us to step out and find just something like this. But right now, it's just -- this is not something we can do even if yields were great and the yield curve was right.

Tyler, and his staff, and Matt, and I, we all understand. We just don't have the balance sheet or the capital to do that. So this is -- I think this is a real good opportunity. Again, we got $1 million in there. I think it's -- yeah, I think it can be a lot more than that, we're just being careful.

And frankly, I mean, we talked about -- this last quarter, we thought there was going to be more gain on sale income in Q2. It's just taking a little bit longer to get to the finish line with some of these buyers. But that's why we think we're pretty confident about the third quarter.

Understood. No, I appreciate that, guys. And then as I just kind of marry that with the balance sheet expectations, I think you said core loan growth in the single digits on an aggregate basis near term. Still thinking of what that could look like in '24 again, as we let the gain on sale model mature. How are you guys thinking about total loan growth going forward?

I mean, if we stay in the environment we're in right now, it will -- we will target that low to mid single-digit loan growth next year as well. But with -- like we're not -- with these loan sales, it's not a requirement to sell everything we produce. So if the curve changes, we have the flexibility to hold more, we have the flexibility to bring funding back on balance sheet out of the sweep program. So we can manage balance sheet size, basically, quarter to quarter. But if we're sitting in '24 like we are right now, the goal will be to manage balance sheet and maximize spread as much as possible.

I don't want to -- and I don't want to overplay this, but it's probably obvious. I mean, we're unique really, especially, in our region for having some money to lend. And we have not completely pulled our horns in. And we're getting looks at some pretty decent deals on the community bank side. I think, in fact, the place where we are raising money on the community bank side on the deposit -- from a deposit standpoint, compared to where we're able to put some money out on really good customers, is probably the widest spreads we've had on the community bank side.

I mean, probably yes since I've been here. So -- and honestly, getting some looks at customers that we probably wouldn't get to normally look at. Now we're not trying to -- we're still on the national platform. We're still being cautious. We're still in the romance stage, where we're making these customers as core as we possibly can before we get very confident about investing at all and just being prudent there.

The sweep helps us because we're positive on the spread there on the whole platform. But I mean, I really like the momentum that we're starting to see on the core bank side, the community bank side. And I think mid-single digits is going to be pretty profitable for the bank.

Okay. I appreciate that, both of you, for the color there. And then just switching gears, a number of steps we're taking this quarter to support the NII and NIM going forward via the seep or the swap. And I was just hoping you could tie all that together, give us a sense for where you expect the consolidated margin to trend in the back half of the year.

Okay. Let me -- Matt, I'll let -- Matt can do the swap part. On the sweep -- the sweep is important to us because really, we can grow. I'm just stating the obvious here, but we can just grow almost infinitely and really not have any impact on our capital ratios, on our margins, or anything like that. Everything we do incrementally on the digital platform has positive spread to it, to the suite. And there's some degree -- there's some amount of that that ultimately is going to pay for the whole platform.

So it's important for us to continue growing that like we have been. And especially now as the Fed keeps moving, our incremental spread just continues to improve there. Most of that goes to non-interest -- all of that goes to non-interest income, except for the portion that offsets sweep deposit, interest expense.

That added 35 basis points to the margin in the quarter. And to the degree that we raised funds in the core bank, which we're raising those funds at very healthy margins at substantially less than the national platform, that means we can sweep more of the expensive money and save cost of deposits and our margins improve. So with that, what would you --

Yeah. I mean, just to put a finer point on that last bit there, Russell, I mean -- and this is sometimes a little hard to appreciate. I mean, it's obvious on the loan side, if we sell loans and we can book the gain on sale and then we can replace those with, potentially, loans at a higher yield and pick up incremental spread while keeping the loan portfolio flat, let's say. We can -- with this sweep, the one-way sweep, we can actually do the same thing on the deposit side. Less so like gains in the near term, but we've got about $500 million of deposits on balance sheet at that higher rate that we raised them at late in the first quarter, so around 5%.

Every dollar that we raise at deposits, either in our local markets with our new digital business accounts that come on or even through checking accounts on the digital platform, every dollar we raise lower than 5%, we can keep those deposits on balance sheet and sweep off the $500 million that's at the higher rate. It doesn't cost us anything because the rate we're getting through the sweep service is basically at the same rate. So we can move them off with no incremental costs, but we pick up incremental spread on the balance sheet.

So we get -- when we talk about managing the balance sheet through loan sales and through the sweep, we're really talking about both sides of the balance sheet. We can -- we've got an opportunity to maybe average up loan yields on the loan side and then average down deposit costs on the liability side. This is all incremental stuff.

So I'm not saying that we're going to suddenly reverse all of the net interest income pressure we saw last quarter. But as we think about the next couple of quarters, we feel confident that we're going to be able to pull some of these levers and mitigate some of the pressure that we've seen here recently.

The other thing I'll say is -- I don't want to give specific guidance on margin because it's been so hard to predict. But I will say if we look at the quarter, the margin compression that we saw was heavily weighted to the first half of the quarter. June was much, much lower. So it feels like we may be -- I can't say that there won't be any pressure in the third quarter, but it should be very incremental versus some of the step changes we saw in the first and second quarter.

Okay, thanks, guys. Thanks, Dennis. And then --

And that would be (multiple speakers) that doesn't necessarily mean net interest income would decline again, but the percentage wise.

Okay, understood. And then -- thank you. Just last one, tying it all together, a lot of proactive steps to improve profitability this quarter. Could you just update us on what you think the glide path is to that 1% ROA from here?

Well, I mean, it's probably first quarter at the earliest the next year because we got to get all the cost saves in place from the branch closures and our consolidations and the rest of -- largely, administrative things that are in place. But all those movements, plus some of the other reductions in operating costs we've talked about, get us most of the way there. And then the rest of the way comes from these loan sales. So we get -- that $1 million of loan sale revenue doesn't get us there, but --

I think that's probably the variable. I mean, if that comes on harder, that's probably going to move us from, to call it, say, 70, 80 basis points closer to one or over one. That's probably the variable.

Great. Thanks to you both. Thanks for taking my questions.

Christopher Marinac, Janney Montgomery Scott.

Thanks. Good morning, Dennis and Matt. I just wanted to go through the cost of funds. And should we think of it maybe bottoming here, given that you're going to get a benefit from the sweep program? And then that kind of covers this last Fed move that we just saw this week. Is that a somewhat good way to think about it?

I hope so. I think so. I mean, we are what Matt -- the point Matt just made about sweeping more of the digital deposits that have a higher rate as we replace them with core bank community bank deposits that have substantially lower rates. I mean, we are working tirelessly on that effort. So yes, that probably, altogether, could put a cap on where we are on the cost front and probably help us on net interest margin.

Okay. And then the other side of that question was really just the abilities to continue to push through both loan and earning asset yields. And that's not done, evolving in your favor.

Correct.

Got it. Okay. And then if we go through the fraud situation, this is not the first time you've seen and dealt with these things. Can you just remind us all the things you've done internally since you've been at the bank and where that positions you going forward and maybe just the cost that you've already put in for some of the systems you've done to avoid future incidents like this, legacy problem?

Oh, my God, I wish I would have prepared better for that. I mean, because -- so that I could be concise. I mean, put in a new chief credit officer, put in a fully staffed credit administration team, lower the level for -- substantially lower the level for analyst and underwriter -- independent analyst and underwriter approvals, put in a full -- I hate to say this, but this is a fact, put in a regularly occurring process for approving loans. In other words, we don't just approve loans randomly, one off, here and there.

I mean, we have a team of experts that get packages, that review loans, and that approve them. And that probably sounds very basic, but we've had to do that. The amount of loan systems and monitoring that we've put in, extraordinary.

I mean, when we focus -- when we say no -- I mean, just learning how to say no to a lot of customers when they want extensions of this or renewals of that. When we -- not being so -- I mean, this is -- every banker that hears this will know what I'm saying. But when you don't have to say yes to every single loan demand, every single loan request, because you have other options, I just -- processes for renewals, processes for extensions, how -- you ask yourself.

How hard do you look at renewals and extensions? Or do you just quickly approve those to get through? We don't do that anymore.

Pretty extensive, honestly. And a lot of that happened right out of the gate because as soon as I got here, we fell into COVID. We had the hospitality book that wasn't performing very well and a lot of other customers that were stressed. And so it was really in that that we just instituted a lot more detailed review, a lot more detailed understanding of everything. So --

And I mean, Chris, I don't want to go into a whole lot of detail. But we're very confident that this was a one-off issue. There's a rogue employee who'd been conducting this for quite a while, taking advantage of his knowledge of policies and procedures and controls, and basically leveraging relationships and his tenure at the bank to avoid a lot of those and get around them.

But what Dennis was just describing is what caused it to all unwind. I mean, he had built a house of cards that he was able to manage under the previous policies and how things were structured. But with those changes that Dennis talked about, it made it untenable for him to keep all the balls in the air. And that's how it all fell apart.

Sure. No, that's all helpful background. Thank you very much for all that. Just a quick final question for me just on the mortgage business. Does the seasonality, both in Q3 and Q4, suggest that you can still make a little bit of pre-tax income now and then have a small loss in Q4? Or do you think it can be better than that.

I think if we can make -- I think Q3 should probably look a little bit like Q2, especially I think with what Matt was saying about the pipeline. So I think Q3 should look mostly like Q2, maybe a little better. I don't know. But at Q4, I think we probably need to be somewhere around $1 million pre-tax profitable so that we don't dip into negative territory in the fourth quarter. And I'm hopeful that the fourth quarter fall-off in production and pipeline and all that -- our goal is to just get it above breakeven for the fourth quarter.

Sure. Okay. Very well. Thank you, both. I appreciate all the background.

All right. Thank you, Chris.

And I show that there are no further questions at this time. And I'll turn the call back over to Dennis Zember for any additional or closing remarks.

Thank you, all, again for calling. Hope you have a good weekend. If you have any questions or comments or want to discuss anything further, Matt and I are available and happy to get on the phone with you. All right. Thank you and have a good weekend.

And this concludes today's conference call. You may now disconnect.