Ameris Bancorp (ABCB) Q3 2020 Earnings Report, Transcript and Summary

Good morning. And welcome to the Ameris Bancorp Third Quarter 2020 Financial Results Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead.

Great. Thank you, Aileen, and thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our Web site at amerisbank.com. I’m joined today by Palmer Proctor, our CEO; and Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening general comments and then I will discuss the details of our financial results before we open it up for Q&A. Before we begin, I’ll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our Web site. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the company’s performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I’ll turn it over to Palmer for opening comments.

Thank you, Nicole, and thank you to everybody who’s joined our call today. We’ve got some exciting news to talk about this morning. I closed last quarter’s call with our new marketing campaign Back to Business Together and I think the third quarter results speak for themselves and reflect that commitment. Nicole is going to update you a little bit later on some more detailed financial results in a minute, but before we get there I did want to share some highlights from the quarter as well as a few other successes we’ve recently had which positively impact our outlook as we go forward. For the quarter, we earned $116.9 million or $1.69 per diluted share on an adjusted basis, which is up over 70% compared to the third quarter last year. This represents a 2.35% return on average assets and a 30.53% return on tangible equity. Our efficiency ratio improved under 50%, which is the first time in our history, down to 47.34% on an adjusted basis. For the year-to-date period, we earned $198.5 million or $2.86 per diluted share on an adjusted basis, which is consistent with $2.85 reported for the same period last year. The big difference being this year we've also provided over 130 million more to the loan loss reserve than we did last year. And that's important to note. The 2020 results represented the year-to-date ROA of 139 and the year-to-date return on average tangible equity of 17.84%. We’re pleased with the organic growth and that's both on the loan and the deposit side. Loans grew over 330 million or 12.2% annualized during the third quarter and that leaves our year-to-date annualized loan growth at 22.1%, and that's including PPP loans and 11%, excluding the PPP loans. We do have anticipated seasonal loan runoff in the fourth quarter and that will bring our loan growth closer to our original estimates of mid-single digits for the full year of 2020. On the deposit side, we continue to see a lot of success there in growing non-interest bearing deposits, which is where our focus remains and now we have accounts that – non-interest bearing accounts equate to over 36% of total deposits. As for capital, we've said for several quarters that we're focused on capital preservation, growth in TCE and growth in tangible book value. During the third quarter, we grew both TCE and tangible book value by over 7%, which is very meaningful. As you know, this quarter we successfully issued 110 million of sub debt, the low rate of 3.78% and this will positively impact our total risk-based capital ratios by approximately 60 basis points. While we remain focused on capital preservation, we announced in our release this morning that our Board did approve extending our share repurchase program through October 31 of next year. While we don't anticipate executing on this during the remainder of 2020, we do like having the option to repurchase our shares if the right opportunity presents itself. As for our dividend, we remain comfortable with where our dividend is today and do not anticipate any change at this time. Moving on to credit, Jon Edwards, our Chief Credit Officer is with us today and he's available to take any questions after our prepared remarks. But I did want to hit a few highlights in terms of credit. We do believe that the heavy lifting of the reserve is complete now, barring any further economic downturn and additional provision expense would solely be related to deterioration in specific credits. This brings our allowance coverage ratio, including the unfunded commitments, to 1.48% net of PPP loans. Our annualized net charge-off ratio was 10 basis points of total loans and that compares to 27 basis points last quarter. Our NPA as a percent of total assets increased to 83 basis points compared to 59 basis points last quarter, mostly due to increased non-accrual loans and residential real estate and commercial real estate loan categories. And finally, the loans that remain on deferral at the end of the third quarter of 2020 are approximately 4.3% of total loans which is down approximately 19% of total loans at the end of the second quarter of 2020. Outside of our strong financial results, we've had a lot of other success around our company. We announced several key commercial treasury hires in new and existing markets. In addition to that, we announced our new diversity/inclusion officer. We're excited to be able to identify talent within the organization that promoted from within for this team leadership position. As for COVID, all I can say is, is we are definitely fortunate to have such a strong presence in the Southeast. We opened about half our retail lobbies in the branches this third quarter with minimal disruption of operation. Support staff is also beginning to return to work safely on a rotational basis. And our customers, like many others, have learned to embrace the digital channels and mobile banking and we continue to have several initiatives there underway just to make that a better experience all the way around for our customers on a remote digital perspective. Branch optimization, we touched on this last time. That is really what's allowed us to reallocate resources to pay for a lot of the innovation and the new hires that I mentioned earlier. We closed eight branches on October 1. We have one additional branch closure in process. That would bring our total branch count down to 161 from the pre-Fidelity acquisition pro forma of 199 branches. So these initiatives, like many others, have been well executed. It's been very thoughtful, but yet expeditious and we continue with our cost save initiatives there. I'll stop now and turn it over to Nicole to discuss our financial results.

Great. Thank you, Palmer. For the third quarter, we’re reporting net income of 116.1 million or $1.67 per diluted share. On an adjusted basis, we earned 116.9 million or $1.69 per diluted share when you exclude merger and restructuring charges, servicing asset impairment, COVID-19 expenses, certain legal fees and a gain on sale of bank premises. These financial results represent a 70% increase over third quarter 2019 adjusted earnings. Our adjusted ROA in the third quarter was 2.35, which was an increase from the 89 basis points reported last quarter and $1.57 reported in the third quarter of last year. Our adjusted return on tangible common equity was 30.53 in the third quarter of this year compared to 11.66 last quarter and 18.95 in the third quarter of last year. For the year-to-date period, our adjusted ROA is 1.39 compared to 1.55 last year-to-date. And also our 2020 adjusted TCE for the year-to-date is 17.84 compared to 18.87 last year. Both of these decreases are driven by the higher provision for credit losses recorded this year as well as the PPP loans also negatively affected ROA. We recorded 17.7 million of provisions for credit losses in the third quarter compared to 88.2 million last quarter. This decrease in provision is primarily related to the improvement of our economic forecast offset by increased qualitative factors in our residential real estate, commercial real estate and hotel portfolios. For the year-to-date period, we've recorded 146.9 million of provision expense in the first nine months compared to 14.1 million in the same time period last year. During the third quarter, we grew tangible book value by 7.5% from 20.90 at the end of the second quarter to 22.46 at the end of this quarter. Our tangible common equity ratio increased 57 basis points to 8.27 from 7.70 at the end of last quarter. And a reminder that this asset – the asset growth from PPP loans negatively impacted that ratio by around 49 basis points. So excluding the PPP loans from that ratio, our TCE would have been 8.76 at September 30. We continue to be well capitalized and we feel comfortable with our capital levels and our liquidity position remains strong. Moving on to margin. While we did experience margin compression this quarter, it was not unexpected. If you remember back in the first quarter call of this year, we projected low to mid-single digit compression per quarter going forward. The margin expanded in the second quarter due to reduced deposit costs and the accretion income that we said was not expected to occur in future quarters. And this quarter, we saw that margin compression that we had previously expected. The non-recurring accretion in the second quarter attributed for over half or 9 of the 19 basis point compression seen this quarter. And the remaining 10 basis points was related to 5 basis points from PPP loans, 3 basis points in margin, and 2 basis points from excess cash. Comparing the first quarter margin of 3.70 to the third quarter margin of 3.64, the margin declined 6 basis points over those two quarters, which was exactly in line with our projections of low to mid-single digits per quarter compression. And our net interest spread actually increased from 3.33 in the first quarter of this year to 3.40 in the third quarter. During that same time period, the first quarter to the third quarter, our yield on earning assets declined by 55 basis points, but our funding costs decreased by 62 basis points. Our core loan production yields declined to 4% for the quarter against 4.16% last quarter. And on the deposit side, we continue to see success in growing non-interest bearing deposits, such that our total deposits grew 474 million and over 66% of that growth was in non-interest bearing. Non-interest bearing, as Palmer said, now represents 36.8% of our total deposits compared to 29.9% this time last year. And while a portion of these deposits less than 30% are related to PPP loan proceeds, those PPP proceeds loan – deposits have been stickier than we first expected. As I previously mentioned, our third quarter provision expense was 18 million. Approximately 27 million was recorded for loan losses, 1 million was reported for other credit losses and then we reversed about $10 million previously recorded related to unfunded commitments. So our total net expense was 18 million. We had approximately 3.6 million of net charge-offs during the quarter and our ending allowance for loan loss was 239.1 million compared to 208 million at the end of the second quarter and 38 million last year. Including the unfunded commitment reserve, our total allowance was 260.4 million at the end of the quarter compared with 246 million at June 30 and 39.3 million at the end of the year. Growth in our non-interest income was record breaking during the third quarter. Our mortgage group had record production, efficiency and earnings due to the interest rate environment. Mortgage production hit new record levels at just over 2.9 billion for the quarter and our gain on sale increased to 3.92, up from 3.53 last quarter. We anticipate that gain on sale to decrease back to normal levels in the 3% range. Net income in the retail mortgage increased to $61 million for the quarter and while pipeline remains strong going into the fourth quarter, we do not expect this level of mortgage revenue to continue. Total non-interest expense declined from 155.8 to 155.7 for the quarter. However, when you remove the COVID expenses, merger restructuring, certain legal fees and the loss on sale of branches that we adjust for adjusted earnings, our non-interest expense totaled 153 million which is up $3 million from last quarter. However, expenses in the retail mortgage segment increased 5.1 million due to the variable costs associated with the increased volume and are more than offset by the 29.9 million of increased revenue. All of our other segments, including the core bank, the administrative functions, premium finance and SBA have a reduction of non-interest expense and improved efficiency during the quarter. This led us to be extremely pleased with our efficiency ratio this quarter. Our adjusted efficiency ratio improved to 47.34 compared to 51.08 last quarter. The additional mortgage revenue and the efficiency gained in the mortgage division significantly impacted this ratio, and we do believe the ratio is going to increase back in the 53% to 55% range in future quarters as we don’t anticipate the level of mortgage revenue and efficiency to be sustainable. On the balance sheet side, we had cautious but solid organic growth both on loan and deposits. Loan growth was 440 million or 12% annualized and about half of that growth was related to the warehouse lines in mortgage. That brings loan growth for the year to 2.1 billion, including PPP, and 1.1 billion or 11% annualized, excluding PPP. As Palmer mentioned, we have several headwinds coming into the fourth quarter, such as cyclical warehouse payoff, ag line seasonality as well as indirect runoff. So we believe our full year 2021 growth will come back in line with our original estimates of mid-single digits for 2020. More details of our loan production can be found in the investor presentation. And as I mentioned, our total deposits increased by 474 million during the quarter of which 313 million was in non-interest bearing. So that loan to deposit – loan and deposit growth helped to keep our loan deposit ratio stable at 93%, which was consistent with what it was last quarter. With that, I'll turn it over to Aileen for any questions from the group.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question today comes from Casey Whitman with Piper Sandler.

Hi. Good morning.

Good morning, Casey.

Great quarter. I guess I'd start maybe just thinking about expenses within the banking segment, which were very well controlled this quarter. Just wondering if you could share your thoughts on how you expect expenses within that segment to trend from here, keeping in mind all the hires you've made to support your expansion, and maybe update us as to whether or not there's any potential for further branch closures or rationalization?

Sure. Casey, that's a great question. So when we look at – one of the things that we've really been focused on and we mentioned in several quarters is that we are trying to find a way internally, we're calling it a reallocation of resources to pay for some of these new hires and pay for the new innovation that we're doing. So, as we previously mentioned, in June, we are closing – we do have some branch closures. We actually have eight branches that closed October 1. So those cost saves are not in these numbers yet. And we have one additional branch closing that's in process. It's been announced and is in process. So those cost saves will come into the fourth quarter, and then that will help offset any of the additional growth in expenses. So we are trying our best. And I know some of the executive team is getting tired of me saying no to certain things. But we are really trying to keep our non-interest expense as stable as possible going forward and trying to find ways internally through efficiencies and technology to pay for those additional costs.

Okay.

So I guess it’s somewhat flat.

That's definitely very helpful. Thank you. Okay. And then maybe just thinking about the movement in problem assets this quarter? Can you give us some more color on the uptick in particular on the residential mortgage non-accruals? I think you noted the majority had expired deferral programs, so that – the basket of small borrowers and these borrowers were just not able to make payments and rather than keep extending the furloughs and moving to non-accrual or sort of what's going on within that bucket.

All right, yes, I appreciate the opportunity to provide a little color on that. Let me say really three things and I really address all of the NPA changes here, not just really the residential ones. But let me say virtually, all of the change was related to COVID. So it's important to know that we really didn't have any surprises that came out of that. We've been saying for a while that hotels were going to be the issue, so changes in watch list, changes in PVRs and things like that are really highly concentrated in hotel borrowers. But from the NPA side, the commercial – at least on the commercial side, there were really only two significant changes. One was a larger hotel loan and the other was a restaurant that decided to close and is in the process of liquidating their real estate. I look at the collateral position we have in each of those and I feel pretty confident that we won't really see any loss in those. Specifically, and I think your question was on the residential side, so we saw an increase of about 100 loans on the residential side, 106 loans that we added to the non-performing list. The average size in that portfolio was $425,000. So it's well diversified. It's not – any loss that we might look at and that's not going to be that significant for us. But really what that represents is our borrowers that had come out of a CARES Act deferral program, but had not yet confirmed or told us their intentions to either resumed payments on their loan or go back into another one of the several options that the CARES Act has. So we were in this middle point of not knowing whether they were going to resume payments or take up another CARES Act program. And so we took the position that we would call those non-accrual until such time as we were settled in the direction in which they were going. Some may stay non-accrual. I do believe that a portion of those will enter a CARES Act. As you know, there's a longer term period that they have programs available. So there are programs that they can enter into, again, several different options. And so a portion of those may settle in the fourth quarter and come out of the NPA bucket, but I felt it was a very – it was appropriate, but a conservative approach nonetheless to consider those nonperformers.

Casey, this is Palmer. The other thing to note on this, as Jon said, I think it's a very conservative approach, because the majority of these individuals are entitled to extend their payments another six months through all these different programs. But if they haven't declared that, we could have easily said, well, they've got another six months and [indiscernible] what we were trying to do is take a more conservative approach to it. And if we've not heard from them, we were going ahead and calling it the way we saw it. The other thing to note too is if we really wanted to be consequential with the earnings we had this quarter, if you wrap all those loans up, we could charge every one of those loans off and still hit consensus and made some meaningful money this quarter.

Okay. So it sounds like these loans actually haven't missed a payment yet and this is just kind of a timing thing, and we'll see which ones --

Yes, there's still a lot of that here. Yes, they're entitled to additional deferments, but they had not – you have the option of either bringing the payments current or tacking them on to the end of your loan. And if they have not responded in such fashion in terms of their intent there, we just went ahead and took the conservative approach. But like Jon said, a lot of these people will either tack it on to this loan or make the payments and then all of a sudden they come back off a non-accrual. But until that time, we just thought we'd be conservative and take that approach.

Okay. And the 106 loans you referenced, how big is that bucket dollar wise?

40 million. 40.7 million.

Okay, makes sense. Okay. And then just one other quick one. You referenced the larger hotel loan. Is that the one that moved on to non-accrual or into TDRs and kind of how big was that?

It was a little less than that, 17 – I'm sorry, 18.7 is what we quote on the slide deck. It was non-accrual. It also created a TDR. So it's on our earnings table. It's in the non-performing TDR category.

Okay. And maybe just broadly, the movement of hotel loans into the performing TDR category this quarter, maybe you can speak to that too?

I can. And just TDRs in general, over 80% of the newly created TDRs for the quarter were in hotels. I will say on the other side though the last slide deck we put out would have been I think sort of mid-September numbers and we had about $240 million worth of hotels that were – that’s been noted is still being in phase two of the payment deferrals. And we only added 130 of that to the watch list. And so of that whole bucket, there was a significant portion of that group of hotel loans that did resume payments like we expected they would. But that last group, and it's a variety of reasons and a variety of locations, just needed that longer runway. And I told our folks that I didn't want to do this for another 90 days. I really wanted to – I didn’t think the hotel sector was going to heal in 90 days. So I told them that if we weren't going to do something through the middle of next year, it really wasn't worth it. So taking that stance, we certainly would have created the TDR but we tried to work with our customers to a length of time that would give them the best opportunity to get back to some level of normalcy.

Understood. Thank you for all the answers and great quarter you guys.

Thank you.

Our next question comes from David Feaster with Raymond James.

Hi. Good morning, everybody.

Good morning.

Again, congratulations on a stellar quarter. I just wanted to follow up real quick on that hotel portfolio. Do you have the reserve allocation to the hotel portfolio? And then maybe do you have any updated debt service coverage ratio or LTV metrics based on current forecasts and valuations?

As far as the reserve is concerned, I don't remember if we've made this comment before, but we determined that the forecast models that we were using really I didn't think would cover the hotel sector that well just because of kind of the short-term improvement versus really what is needed in the hotel sector is a lot longer than that. So we did separate the hotels out of the normal commercial real estate and established that group in its own category in the reserve for the quarter and looked at it from that perspective, and also a key factor overlay just because of the level of deferrals and the new watch list loans and so on. So, we did treat that as a separate category. From an overall LTV perspective, I didn't go out and get all of those hotels reappraised. The valuations that we did get were – they weren't materially different. And I think that's just the factor of kind of thinking through stabilized. Honestly, you take that date and time and occupancies, you're hovering in the mid-40s to mid-50s. Clearly, the valuations are going to come down. The good part about that is, is that and I've said this before, our hotel portfolio overall started or I should say pre-COVID was around 60%. So we have the capacity to see a revaluation even at 20% or 25%, and only have that portfolio stretch to say 75 or 80 overall LTV. So, it's a good portfolio from the collateral perspective, and I'm not as worried about losses as I am about just getting the hotel sector healed.

That makes sense. And then just switching gears to loan growth, you guys have had terrific organic loan growth. Great to see the new hires recently. I guess, how do you think about the pace of growth as we enter 2021? I appreciate the color on the seasonality in the fourth quarter, but obviously we've got the tailwind through the economic backdrop, the new hires hitting. Just curious how you think about organic growth as we enter 2021?

Yes. I would tell you that the pace of the growth will be measured. I'll also tell you that the type of growth we're having a lot of it is, as you mentioned earlier, we've had a lot of significant new hires, especially on the C&I front, and those individuals are going to be contributing in a meaningful way. And a lot of that’s going to just be taking business from other banks. So it's, as I said in the past, it's not going to be more aggressive, it's just going to be more active. And so that's why I see a lot of the opportunity for us as we get forward.

Okay. And then just – what's the pipeline for new hires? You guys have done a tremendous job hiring new guys across your footprint, and even in these new markets. What is the pipeline for new hires look like? And when do you think you're going to be able to continue to – Truist [ph] has kind of been able to be a bit more defensive just given the pandemic, but just how do you think about starting to pick off more lenders from there and gaining share in that middle market from them?

Yes, a good question. I think the defensive posture a lot of banks have been able to take or has is the luxury of a COVID. I think that's coming to an end and at least in the Southeast, because we are – as I've mentioned in my prepare remarks, we are fortunate to have a strong presence in Southeast because the business here just continues to improve. That being said, the pipeline of new candidates is exciting in terms of the opportunities there, but we are also having to be measured and layering in those expenses and being mindful of the cost associated with that. So we will continue to layer in that expense in that overhead as we've got the expenses saves to cover it. But the pipeline will continue – talent continues to be robust and a lot of that has to do with the fact when you bring on the, I call them the influencers that we have, they've obviously got pretty loyal following themselves, having come from other institutions, so a lot of that pipeline is made up of new talent from – a potential new talent from our new hires.

All right. Thanks, guys. Again, congrats on a great quarter.

Thank you.

Our next question comes from Brady Gailey with KBW.

Hi. Thanks. Good morning, guys.

Good morning, Brady.

Good morning.

So you all did a pretty good job at holding the NIM relatively stable year-to-date a lot better than peers. I know you've talked about this kind of low to mid-single digit decline per quarter, which is what we've seen. Nicole, do you think the margin is close to a bottom here at 3.64 or do you think we should continue to think about NIM shrinkage going forward for the next year or so?

Brady, that's a great question. And I think that as much as I want it to be at the bottom, I don't think it's there yet. So as we model out and we have been very aggressive on the deposit side, and I'll tell you one of the things this cycle is that everybody has been aggressive on the deposit side, which we don't really see any crazy competition out there, which has made it available so that we can be competitive and reduce on the deposit side. So we continue to look for opportunities on the deposit side, but I do still see low single digit compression for at least the next two quarters, 5 basis points to 6 basis points over two quarters. When you look at our CD portfolio, we still have about $560 million that's currently at 1.36 that will reprice between now and the end of the year. Our production rates in the third quarter was 46 basis points. So if we can get that 560 million at 1.36 to reprice down significantly, that will be one of our biggest wins for the fourth quarter. And then we have about another 1.3 billion over 2021 that will reprice and that's at a lower rate. That's actually at a weighted average of 98 basis points, so not as much room but there is some room there for it to come down as well. We continue to look on the other deposit side and deposit products. And then really the other thing is on the one side is that we internally have said that we're kind of street fighters looking for every basis point that we don't have to go. We can compare – we've said we will compete on 1 basis point and not just necessarily the 25 basis point increment. So anything that we can do to protect the margin, our bankers have been very, very cognizant of that and very successful in doing that. They've done a great job. But I do see a little bit more compression before we bottom out.

Okay. And then on the buyback, I saw the extension of the date. You have about 86 million left in that authorization. Do you think you'll be active on the buyback in the near term? And the stock is still pretty cheap at one-three [ph] times tangible? Is that something you plan to act on in the near term or not yet?

Not yet. As I said, I don't anticipate any activity really there between now and the end of the year. But it's – we did want to have that readily available in the event that we choose to do so.

And then finally for me, Palmer, it's great to see all these talented hires that that you've got this year. Maybe on the non-organic side, I know related to M&A, to me it felt like you were a little more upbeat on M&A on the call last quarter. So just an update on kind of how you're thinking about M&A going forward?

Well, I'll tell you we're focused on growth and good measured controlled growth and whether that be organic or M&A if the right opportunity comes along. But I think as we look at M&A, the most important thing for us is just to be well positioned and to be in a position of offense, regardless of what gets thrown our way. And like I said, we like to focus on the things we can control and then mitigate the things we can't control. So I think my comments last quarter really pertained to the industry. I think you're going to see some significant M&A activity as we get to the end of this pandemic. And a lot of that is activity that has been bottled up quite frankly for the last several quarters. So I think you'll see a sudden surge in M&A activity. We are focused on growing the company organically. But if M&A opportunities come along that makes sense and they're accretive in the earn-back and we’re – the currency is where it needs to be to be able to allow us to participate in M&A, we will certainly consider that.

Okay, great Thanks, guys.

Thanks, Brady.

Our next question comes from Kevin Fitzsimmons with D.A. Davidson.

Hi. Good morning, everybody.

Good morning, Kevin.

Nicole, I just wanted to follow up on the margin outlook. So the low to mid-single digit compression per quarter is the way to think about that as you're talking more about the core margin and then the PAA can swing within some range quarter-to-quarter, but is the way to think about that as staying roughly the same with what we've got this quarter?

That’s right. You got it exactly right.

Got it. Okay. And then if I could just ask about TPP. I know it's a moving target in terms of how the SBA is reacting to it. But if we were thinking last quarter that the juice of the origination fees would flow through the margin mostly in fourth quarter, is it now reasonable to be pushing that mostly into first quarter if we're assuming that the forgiveness starts to heat up later this quarter, but the bulk of it, the loan payments end up happening in the first quarter?

I think that the question of the day is when do those forgiveness – when do they start granting forgiveness and when do those loans get paid off and when do we take that in? So I have continued to model that with just the normal amortization. And so I do not have any of that potential headwind – tailwind, sorry, any of that potential tailwind built into my guidance. So I've also kind of assumed that as we get some of that tailwind of early payoff and we start having that income, I assume the street and analysts would kind of do an analysis and possibly exclude that. So, certainly as that comes in knowing that we still have $30 million or so of deferred revenue of fees that will come in as those are forgiven, that would certainly help the margin. But I don't have any of that built in when I say the margin compression. And as far as your timing, fourth quarter, first quarter, second quarter, I know that's a three-quarter window. But I think we're really going to see it starting to come in probably fourth quarter, first quarter just as fast as the SBA – they're kind of discretion as to how fast they work through those.

Okay. And I know there's been so much focus on the hotel exposure and industry-wide and appropriately so. But I think for the banks, the real – when investors look at the risk, it's more about if economic weakness spills over into commercial real estate more broadly. And Palmer, you made the point earlier that the Southeast is really doing very well and it's been open for quite some time and that's benefiting it where I think there are certain pockets more like New York City and more urban areas that have more distinctive issues they're dealing with. But what are your observations and expectations based on what you see today? I would assume you're keeping a close eye on that. And just what makes you feel comfortable or what gives you concern today on that subject?

You're exactly right. We keep an eye on each line of business and more specifically, each individual vertical. And I think we kind of break it down. And Jon and his team do an excellent job in terms of getting granular looking at retail centers versus office versus industrial. The industrial market throughout the Southeast is extremely strong and robust. It's amazing how well that's performed. Obviously, the hospitality is impacted. Office, dependent on the office where it is, we don't see as much impact there on a broader basis and a lot of that – and dealing with a lot of the large commercial real estate firms that we get a lot of our data from, they – while there are certainly people that are moving around in terms of square footage, what they need, they're not seeing a lot in the way of defaults, nor have we on our portfolio. Retail, I think you have to look at each specific credit there. If you've got a credit tenant or an anchor tenant, a lot of ours are, for instance, like a public shopping center and that's a very different type of scenario than one that's in a more suburban retail center. And so we keep a close eye on those. But overall, when you look at the Southeast, like I said, it's a very different market than a lot of the other banks are experiencing. Most of our credits, as you well know, are in that Southeastern footprint. So right now we're cautiously optimistic. But certainly, we've got a very conservative credit filter here. And if we see anything that looks out of the ordinary, we're going to go ahead and address it. But right now, that being said, I think Jon gets a report regularly in terms of the – on the retail side, for instance, which is where we've got a lot of focus in terms of the payment from the tenants to the landlords. And right now our collection rate is still running around, what, 90% or better, which is pretty impressive. And so we feel cautiously optimistic is probably the best way to put it.

Okay. Thanks very much.

Our next question comes from Christopher Marinac with Janney.

Hi. Thanks. Good morning. Palmer, can you update us on the Augusta initiative? And should we expect additional hires and new business flows there?

Yes. Augusta is going to be a bright spot for us when you look at 2021. Somebody earlier had asked about growth. As you all know, Remer Brinson joined us and he is well known in that market and he's covering the Augusta-Savannah, kind of the coast for us there. And we will definitely have some additional meaningful hires there to take advantage of that opportunity. I think Augusta oftentimes is overlooked when you look at Georgia because so many people have a tendency to focus on Atlanta. But Augusta is a vibrant market. It's got a tremendous amount of opportunity. And quite frankly, I think it's underserved in terms of banking. So Remer is going to take full advantage of that and we're going to take full advantage of his talent. So the answer to that is, yes, there will be additional hires in that market.

Okay, great. Thank you for that. And then just back to the mortgage business in general. How sensitive do you think the mortgage business is to the 10-year rising a little bit? Should we think of it as coming off of the bottom and that's an issue or is it more that it's still half of where it started the year?

Well, I think depending on the magnitude of the rising, how quickly it rises, you kind of get that shock and that does kind of have – create a pullback. But right now, rates are so low and inventory levels are so low that I think there is more of an impetus for people to go out and purchase a home today. So I look at [indiscernible] lot pipeline. And when I look at the lot pipeline even into the fourth quarter, it's very encouraging to see. And I don't see a lot of fallout and the pull-through rates continue. But I do think if we had a shock to the 10-year and had a rapid escalation there, I think you have a lot of people that will get off the fence immediately. So you – quite frankly, you'd probably see a spike and then you'd probably see somewhat of a pullback.

Got it, Palmer. Thank you for the additional color. I appreciate it.

You bet.

Our next question comes from Brody Preston with Stephens Inc.

Good morning, everyone.

Good morning.

Good morning.

I just wanted to ask a question. I appreciate the slide you guys put in there on the CRE production. Just wanted to ask, it looks like you all maybe over the last quarter or so have gotten a little bit more conservative from an LTV perspective. Just wanted to know if that was intentional or if that's just how it worked out on the numbers?

Well, that's a great question and I really appreciate you bringing it up, because it has been somewhat intentional. I think I mentioned as COVID kind of came on us that we made a few changes to our underwriting. And one of those things was that we were looking for a little more equity and in a lot of cases trying to get payment reserves that would take us out to a place beyond what we thought at the time was COVID. So yes, it was somewhat intentional. It was intentional for us to do that.

Okay. Thank you for that. And then I'm assuming just given those are new originations that those are being underwritten at debt service coverage ratios and LTVs that are based on current values and cash flows. And so just wanted to better understand if you could give us a sense for how values for similar asset classes have changed over the course of the last year?

Well, that's a good question. And I was mentioning it earlier the economics, especially in our four-state footprint have not – everybody is looking to underwrite a new hotel loan. So the sectors that had – that we're still underwriting into are not – haven't really been impacted enough to where valuations are coming in minor what you would expect from last year. So they've held up fairly well and we stick to those sectors that have been less impacted and we just haven't seen a material change in valuations there.

Okay, great. And then I guess just one more around the sort of LTV topic. I did notice, just the grade 5 loans, which I know are performing, but they have LTVs that are above 100% based on their current collateral. Those ticked up a bit. And so I just wanted to get a sense if you had started reappraising some of those loans and if that's what drove it? And if so, if there was any specific asset class that drove the increase?

That's a good question. There are several reasons beyond that that we would grade a loan of risk rate 5. And honestly, the majority of what the change was during the quarter was the reflection of those loans that were still in deferral. So yes, we did do updates on evaluations, certainly on problem loans, potential problems. Grade 5s, on a few may be, but primarily what you see in that is just the fact that if we had a borrower that entered that second phase, I felt like that we would – we would grade that a 5 at best until we got clarity as to whether they were going to come out fine on the other end or whether they were potentially going to see something worse happen.

Okay. And you guys gave some pretty good color earlier on the mortgage portfolios that rolled out of deferral and into NPA. It seems like that was relatively idiosyncratic. And so I'm assuming that there is not – there haven't been other asset classes that have immediately rolled out of deferral and into NPA. They just kind of started resuming normal payment. Is that fair?

That's fair. Obviously, the two loans I mentioned on the commercial side rolled out of deferral and did not have the capacity to continue and needed a third. And so we put those on non-accrual. But nothing like the residential side. It was not that widespread. It was just sort of loan-by-loan.

Okay. I had a couple of – just some clarification on the loan portfolio. Just wanted to better understand what drove the $125 million decrease in consumer installment? I'm sorry if I missed that. And then the indirect auto runoff, how much of that do you expect to sort of runoff quarterly and when do you expect that portfolio to be completely runoff?

Yes, that's a good question. Actually, I think that's a little bit one and the same answer, because the decrease – a portion of the decrease in consumer loans was a reclass of about – is it 40 million or 50 million into held for sale?

50 million.

$50 million of reclass from held for investment to held for sale. But indirect portfolio amortization was about $120 million for the quarter. So that really hit the majority of the consumer portfolio. I think the decline is primarily in that. As to the balance remaining and the amount that it would runoff, that amortization has been fairly consistent over the last few quarters. So you can kind of sort of just see that I think over the next couple of years. It's probably the duration that we'll have remaining on it.

Okay.

We have obviously slowed down a little bit – it felt like clockwork and the portfolio there in credit has just held up extremely well during this downturn, very similar to the last one.

Yes, understood. I do have a question on the SBA. You noted that the gain on sale for that had increased with your team sort of refocusing post-PPP. Just wanted to understand, is that sort of repeatable moving forward? And then how big is the pipeline and where is paper pricing right now given that we're coming out of a recession and still on a zero interest rate environment?

Yes, the premiums are still pricing very favorably right now. You're looking at the 1.10 and above. And so that's still a very attractive option for us obviously to sell the guaranteed portion. But the – we are rebuilding the pipeline. It can't build fast enough as far as I'm concerned, because I think that paper is very meaningful. And during this cycle, it's even that much more important to continue to build it. So our pipeline is getting close back to where it used to be, but obviously the focus has moved back from PPP to normal organic origination. We hope to see that continue to grow. And that's also an area where we hope to find some new originators to help supplement that SBA growth.

Thank you for that. And then just the last one from me just want to get a sense if you had made additional mortgage hires to sort of help with the volume that you've seen or are you simply doing more with less? And then as we think about next year, obviously the efficiency ratio on that business line is probably best-in-class at 40%. And so as revenue kind of – as those originations and the mortgage banking revenue declines, is it going to be dollar-for-dollar with expenses or should I expect some of the expenses to kind of stick around a little bit?

No. There's going to be a lag effect. But I will tell you as quickly as we have moved to adapt and absorb the increase in production, we would move equally as quickly to eliminate the expense. And that's a very scalable business. But you do have to be – you don't have to be premature, but you do have to be consequential. And right now, we have not added – to answer your earlier question, we have not added any new additional teams. This is really production with our existing teams and they're all just on a great run rate right now. And the pipeline going forward is reflective of that as well. And we continue to see a meaningful amount of purchase versus refi business and that's always encouraging to me. I love seeing the purchase business continue to increase. So we're kind of even in this low rate environment, we're still running at about 50-50. And I'd like to see that get up even higher on the purchase side, and I think it will, as Marinac mentioned earlier, if we start seeing rates come up a little bit. But I view that more as a positive. But that being said, because the business is scalable, you got to immediately react to that and cut accordingly to maintain the kind of efficiency ratios that we expect to have in a mortgage company. And the leadership there has proven that they are able and willing to do that.

Awesome. Well, thank you for taking my questions. I appreciate the time everyone.

Thank you.

Our next question comes from Jennifer Demba with SunTrust.

Hi. This is Brandon King on for Jenny.

Hi, Brandon.

I just have one question. Is there any consideration of any potential bulk sales of problem loans, for instance, in the hotel book, has there been considered? Well, I just want to know your color on that.

As we look forward, Brandon, that's certainly an option that we would consider. So much of that is obviously driven by pricing and what kind of pricing we have in the market and what we're willing to accept. So that's certainly an arrow we will keep in our quiver, if it's appropriate to do so. So I wouldn't tell you it's out of the realm of possibilities, but it would have to be – we have to feel comfortable with the sale price for that to happen.

Okay. Thanks. That's all I had.

Great. Thank you.

This concludes our question-and-answer session. And I would like to turn the call back over to Palmer Proctor for any closing remarks.

Thank you. I'll wrap once again by thanking everybody for listening in this morning. And in closing, I will share with you that we're extremely excited as you can tell about the future and the progress here at Ameris. It's nice to know we've got all our conversions, all our integrations, all of that is behind us. So we're at full speed ahead in terms of our opportunities that are in front of us. And that sounds strange, but even during these uncertain times, we feel like we are extremely well positioned. We're focused and we're disciplined and we're focused on the things we can control. And as I mentioned earlier, we are still preparing for the things that we can't control. But the Ameris team remains strong, disciplined and focused on the future, and we see a lot of upside going forward and I just want to thank everybody once again for participating this morning. Thank you, operator.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.