Ameris Bancorp (ABCB) Q4 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ameris Bank Q4 Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. 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.

Thank you, Grant, 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. 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 good morning to everyone. 2020 certainly provided all of us a lesson in humility for humanity, and I'd like to begin by thanking all of my Ameris teammates, our customers and all of our stakeholders for their continued commitment, their loyalty and the great flexibility they all demonstrated during this unprecedented year. And what a year it’s been. While 2020 was not what we had anticipated, I'm proud of our team because they adapted quickly and remained disciplined and focused on the results. And Nicole is going to update you on the detailed financials in a few minutes. But before we get there, I did want to share a few highlights about the quarter and the year, and then spend some time discussing the plan and opportunities we have going into 2021. For the quarter, we earned $102 million or $1.47 per diluted share on an adjusted basis, which is up over 53% compared to fourth quarter last year. This represents 2.04% return on average assets and a 25.04% return on tangible equity. As expected, our efficiency ratio increased slightly to 52.67%, which is right within the guidelines that we have given in terms of 52% to 55% in terms of our guidance earlier in the year. For the year 2020, we earned $300.5 million or $4.33 per diluted share on an adjusted basis, which is up 14% over the 2019 results. This represents a year-to-date ROA of 156 and the year-to-date return on average tangible equity of 19.77. Our efficiency ratio improved during the year from over 55.67% last year to 52.17% this year. On the balance sheet side of things, I said last quarter that we anticipated some seasonal loan run off in the fourth quarter that would bring our loan growth closer to our original estimates, as we've said throughout the year in terms of mid-single digits with full year 2020, and that's exactly what happened. We ended the year with a solid 6.5% loan growth and that's exclusive of the PPP growth. We continue to see strong deposit growth and our total deposits are now almost $17 billion with non-interest bearing deposits now accounting for over 36% of total deposits. As for capital, we remain focused on capital preservation and growth in TCE and tangible book value. During the fourth quarter, we grew tangible book value by over 5% and over 13% for the year-to-day period, which is very meaningful. As reported last quarter, we do have a share repurchase program in place that’s good for October 31 of this year. We don't anticipate buying any purchases in the near future nor did we buy any in the fourth quarter. But we do like having the option to repurchase if the right opportunity presents itself. As for the dividend, we remain comfortable where our dividends are today and do not anticipate any reduction 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. During the fourth quarter, we opportunistically and selectively sold approximately $87 million of hotel loans which greatly reduced our hospitality exposure, and as a result of that, we incurred a $17.2 million net charge-off. And as far as the remaining reserve, we continue to believe all the heavy lifting has taken place and have been completed, barring any further economic downturn of deterioration in specific credits. So this brings our allowance coverage ratio, excluding unfunded commitments, to 1.46% net of our PPP loans. Our annualized net charge-off ratio is 31 basis points of total loans compared to 10 basis points in 2019. Exclusive of the hotel loan sale, the year-to-date annualized net charge-off ratio was 18 basis points of total loans. Our non-performing assets as a percentage of total assets decreased to 48 basis points compared to 82 basis points last quarter, and mostly due to the $24 million decrease in non-accrual hotel loans that I referenced earlier that were included in that note sale. 32 million of mortgage loans reported as non-accrual on the third quarter have now been placed on the new CARES Act deferral programs, and the net decrease in OREO of $6 million. And finally, the loans that remain on deferral at the end of the year were approximately 2.9% of total loans, which is down from approximately 19% of total loans at the end of the second quarter of 2020. A quick update on COVID and PPP. I've said on the last call that we had opened up about half our branches in the lobbies in the third quarter with minimal disruption. But unfortunately, with the rise in cases, we’ve closed those lobbies again before the end of the year and we really don't anticipate having them open until March or we start seeing some positive swings in the cases. But we've done a wonderful job of continuing to be able to serve the customers through the drive-throughs and digital channels or in the branch by appointment. And that being said, we are extremely pleased to be in the Southeast, because I can tell you as many businesses here are back open; restaurants, retail shopping and certainly the traffic continues to pick up every day, so that's encouraging to see. But we all still need to remain diligent and careful. A quick update on PPP. During the fourth quarter, we started to see forgiveness and our PPP loans decreased by about 238 million. On the new round of PPP, our portal is open and so far we've received about 2,000 applications for approximately $220 million, just as an update. So approximately 80% of that is second draw requests from customers who were also participants in the first round and 20% of applications are from new applicants. So our average loan size request has been around $130,000 for the second request and $30,000 for the first request, and this is obviously smaller than the first round as expected in terms of the loan amounts. Now, I'd like to talk briefly about the future, why our optimism is justified. When you look at the challenges we all faced in 2020, and then you consider the success that Ameris had, it really makes me proud of the company and our teammates. And this year was certainly not anticipated, but we were able to overcome the challenges and adapt and improvise on our plans. And more importantly, we successfully delivered on top financial results. And as typical in the first quarter, we spent time and our Board retreat is actually virtual this time, but that's always an energizing program and process for us because it allows us to kind of reflect on our markets and our strategies and our talents and our goals. And, as I mentioned earlier, we are fortunate to be in some of the highest growth markets throughout the Southeast. We've got incredible talent and we got good core strength of our more rural markets too, and this balance is really what has allowed us to continue to grow safely and securely and most importantly in a low cost deposit environment as far as funding is concerned. So we continue to look for cost saving measures to be able to fund the needs of technology and resources, which are imminent and we're already reaping the benefits from a lot of the investments we made in 2020 from our reallocation of expenses. But we remain focused on core deposit and loan growth, asset quality, operating efficiencies and capital preservation, and these are the strategies that you will see will continue to drive shareholder value. I'll stop there and turn it over to Nicole to discuss our financial results.

Great. Thank you, Palmer. As we mentioned, for the fourth quarter, we're reporting net income of 94.3 million or $1.36 per diluted share. On an adjusted basis, we earned 102 million or $1.47 per diluted share and that's excluding things like the servicing asset impairment, COVID-19 expenses, certain legal fees and a gain on sale of bank premises. These financial results represent a 53% increase over fourth quarter of 2019 earnings. Our adjusted ROA in the fourth quarter was 2.04. That was a decrease from the 2.35 last quarter, but it was an increase from the $1.47 reported fourth quarter last year. Our adjusted return on tangible common equity was 25.04 this quarter compared to 30.53 last quarter, again, an increase from the 18.45 reported in the fourth quarter of 2019. For the full year 2020, we're recording net income of $262 million or $3.70 per diluted share. On an adjusted basis, we earned 300.5 million or $4.33 per diluted share. That compared to 222.9 million and $3.80 last year. So that brings our full year ROA to 1.56 compared to 1.52 last year, and our full year ROTCE to 19.77 compared to 18.74 last year. As we’ve stated, we've previously emphasized our focus on capital and tangible book value growth. For the quarter, we saw an increase in tangible book value of $1.23 to end the quarter at 23.69. And for the full year, we had 13% increase in tangible book value, about $2.88 from 20.81 last year to 23.69 this year. In addition, our tangible common equity ratio increased 20 basis points to 8.47 this quarter. And as you remember, the asset growth from our PPP loans negatively affect that ratio. This quarter, that was about a 38 basis point impact. So excluding those PPP loans from our total assets, our TCE ratio would have been approximately 8.85 at the end of the year, which is very close to our stated target of 9%. We continue to be well capitalized and we really feel comfortable with our capital level. Talking about margin, we previously guided that we expected low to mid single digit margin compression going forward. So we were extremely pleased with the stable margin of 3.64 in the fourth quarter. That was consistent with what we had in the third quarter. And while there were many moving parts in margin this quarter and a lot of hard work and effort from our bankers that show you our spread actually improved by 3 basis points this quarter. So on the compression side, we reversed $2.3 million of interest income on loans that were sold in the hotel note sale. And then we also saw compression from the excess liquidity on the balance sheet of approximately 9 basis points. However, those negative impacts were offset by the accelerated accretion of PPP fees due to the early forgiveness. And again, there were a lot of moving parts, but those are kind of the three highlights that really netted out to that stable margin. During the fourth quarter, our yield on earning assets declined by 4 basis points, while our interest bearing deposit cost decreased by 13 basis points, and our total funding decreased by 7 basis points, hence the improvement in spread. Our core bank production yield declined slightly to 3.86. But on the deposit side, we continue to see success in growing non-interest bearing deposits. Our total deposits grew 894 million and over 26% of that was in non-interest bearing. Our non-interest bearing now represent 36.27% of our total deposits and that's compared to about 29.9% this time last year. We do believe this is affected by the excess liquidity in the market, and we believe this can return closer to 30% in the long-term horizon. However, we do remain diligent in protecting these deposits through superior customer service, product enhancements and technology improvements that we've got. So for the year-to-date, our margin declined 18 basis points from 3.88 to 3.70, even with the large 150 basis point Fed cut in March. I think it's key to look at our yield on earning assets decreased by 67 basis points, while our funding costs decreased by 65 basis points. We felt that we were quick to cut costs or to cut funding costs and our deposit costs. Talking about provisions, during the fourth quarter, we reversed 1.5 million of previously recorded provision expense. That decrease was primarily related to the improvement of our economic forecasts, particularly levels of unemployment and GDP. And that was offset by increased qualitative factors that we added in our commercial real estate and construction portfolios. For the full year, we recorded $145 million of provision for credit losses and that was compared to just 20 million last year. Our ending allowance for loan loss was 199.4 million compared to 231 million at the end of the third quarter and just 38 million at the end of last year. Including the unfunded commitment reserve, our total allowance was 233 million compared with 260 million at September 30 and 39 million last year. Non-interest income in the fourth quarter remained strong due to continued elevated production in the mortgage division. Mortgage production was right at 2.8 billion for the quarter and gain on sale increased over 4%, up from 3.92% last quarter. We anticipate that gain on sale to decrease back to normal levels more in the 3% range going forward. Net income in the retail mortgage division was 43.4 million compared to 61 million last quarter, but 11.6 million in fourth quarter of last year. While pipelines remain strong and we continue to see the strong production in 2021 so far, we do realize that this could return to normal levels at some point this year, and we're prepared. Total non-interest expense continued to decline this quarter from 163.7 million last quarter to 151 million this quarter. Expenses in the retail mortgage division decreased 4.7 million, while expenses in the core bank and administrative functions increased 2.1 million. And I want to talk about those two separately. So the increase in core bank and administrative functions is really attributable to three things. There was a $1 million donation that we made to the newly formed Ameris Bank Foundation, a $765,000 expense related to the early termination of our loss-share agreements with the FDIC, and then $532,000 of OREO write down. So despite the expense to terminate these loss-share agreements, we do believe that exiting them will enhance our operational efficiencies going forward, both from a functional administrative perspective as well as the economic impact of call back accruals and recovery sharing going forward. We continually -- as usual, we prudently exam non-interest expense and we anticipate minimal increases in the core bank. And now moving on to the mortgage segment, we do anticipate decreases in the variable costs as production decreases back to normal level, although I want to remind everybody that there's always that cyclical first quarter results such as payroll taxes. To time our efficiency ratio, we're pleased with our efficiency ratio this quarter and the overall progress we made here. Our adjusted efficiency ratio was 52.67 this quarter compared to 55.61 fourth quarter of last year. And for the full year, our efficiency ratio improved to 52.17, down from 55.67 last year. The additional mortgage revenue and the efficiency gain in the mortgage division significantly impacted this ratio during the second and third quarters. We believe the ratio will stabilize in the 52 to 55 range in future quarters, as we do not anticipate the level of mortgage revenue and efficiency to be sustainable long term. On the balance sheet side, and this is really a focus, we're excited to say that we ended the quarter with total assets of over 20 billion at 20.4 billion compared to 19.9 billion last quarter and 18.2 billion last year. So, as Palmer mentioned on the balance sheet, I want to give a little -- some details on that. We did experience a cyclical run off. And if you remember to the third quarter, we said that we were anticipating that. So our total runs decreased a net 463 million during the quarter. But I really want to break that down and explain that we had expected decreases of 735 million, and that was offset by organic growth in the core bank of just over 280 million, or 7.6% for the quarter. Let's talk briefly about those decreases, not to rattle off a lot of numbers, but I do want everybody to understand that that $735 million of decreases were intentional known [ph] and didn't really have -- it was not a surprise to us. So those decreases included the $238 million in PPP reduction, $102 million of the continued indirect runoff, $87 million in the hotel note sale, an additional $87 million in strategic runoff on the homebuilder line, $80 million of some cyclical mortgage warehouse lines as well as about $20 million in the cyclical ag line that is a typical fourth quarter event for us. In addition, we had $141 million of consumer loans that we transferred to the held for sale category. So again, excluding that, you take that 735 million of runoff, that leaves us with $280 million to $300 million of organic loan growth, which again was 7.5% for the quarter, which we were pleased with. For the full year, our net loan growth was 1.7 billion or 13%. That included PPP. If you exclude the PPP activity, net loan growth was 835 million, or 6.5%, which was in line with our expectations of mid-single digit loan growth. Additional information on the loan growth and the loan portfolio can be found in the investor presentation. So to wrap up, we are managing through this low rate environment and protecting our margin as much as possible. We continue to see strong non-interest income from the mortgage division and pipelines remain strong going into the first quarter. We, as always, are watching expenses and are finding ways to pay for new technology through reallocation resources, and we remain committed to preserving capital. With that, I'll turn the call back over to Grant for any questions from the group.

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

Hi. Good morning.

Good morning, Casey.

Good morning, Casey.

Maybe I'll just start by continuing where you just left off the call with. Can you maybe just give us some thoughts around how you're thinking about loan growth in 2021? Given all the puts and takes with indirect auto still running off, but the Southeast opening up and all the hires you've made, how should we sort of think about the range of growth that you guys can put up in 21?

Yes, I'll take that, Casey. This is Palmer. We feel very encouraged by that. And when I look at the pipelines, which is really indicative of what the future production looks like, it's more than encouraging as we look into first quarter, which is traditionally a seasonal quarter where you have a little pullback. But there certainly remains headwinds in the economy and in paydowns. But what we're seeing in terms of the pipeline and sustainability of what we've got, whether it be the new commercial initiatives, we've got 10 new C&I lenders, or whether it be on the mortgage front, or when I’m looking at the pipelines now, we've got incredible volume still coming through those pipelines. I think that it's going to be a strong first half of the year for us. And like I mentioned in my comments too, I think the benefit we have is obviously being well positioned in the markets we're in. And as a result of that, we feel very confident in our ability to still continue to deliver on the growth side. And if you look at applications and locks, just in mortgage alone, we're still above where we were in November, December. And it's almost double of where we were in January of last year. So it's starting out pretty solid in terms of the activity. Obviously, refi activity should slow as rates go up. But the purchase activity continues to be robust. And I think we'll see a lot of opportunity there as it pertains more specifically to mortgage.

Okay, got it. And maybe ask one more, just can you give us an update, Palmer, on how you're thinking about M&A this year as we come out of the pandemic? It's been some time since LION. So, how should we think about your appetite at this point for additional M&A?

Well, I'll tell you as we've been very consistent in saying all along in terms of the discipline here at the company, our first and foremost focus is always on organic growth and our ability to generate strong top tier earnings, which we have proven over the last 18 months. We've had very little noise in our earnings over that period of time and it's really allowed us and the market to see the earnings power of this organization without M&A. That being said, I do think there's going to be some opportunities and we will remain optimistic. And I think some of the opportunities that may present themselves have more to do with where we're headed in terms of the economy and where we're headed in terms of ease for technology. So I think the opportunity for M&A as we look out into 2021 will be robust for the industry. And what we want to do is remain in a position of offense and be able to be nimble and take advantage, if necessary, if we deemed appropriate for a potential target.

Makes sense. Thanks for the call. I’ll let someone else jump on.

Thank you.

Our next question will come from Brady Gailey with KBW. Please go ahead.

Hi. Thank you. Good morning, guys.

Good morning, Brady.

Good morning, Brady.

So if you look at what Ameris did in mortgage last year, it's just amazing. If you back out the MSR impairments, there’s $414 million of mortgage banking fees. It's unlikely that's repeatable this year. We've got volumes going down and gain on sale coming down. Any idea how much those fees could decline this year? What the magnitude could be?

Well, I think that's going to be specific to the mortgage operation of each individual bank. I would tell you our operation is very different than most and I think that's reflected obviously in the success we've had this year relative to our peers, and I think you'll find the same thing to be true as we look forward, because when you look at the same numbers I do in terms of the MBA estimates. But if you drill down into those estimates, what you'll find is, is that the purchase activity will actually increase the refi activity, which is a drop off. So when you hear people saying it's going to drop 50%, well, that's all for the most part due to the refi activity. I will tell you our shop has never prided itself on refi activity. It’s mainly purchase activity and relationships we've got with builders and realtors we've established over many years. So I think what you'll find is a lot of the shops that have gorged on the refi activity to the detriment of the relationships of others will probably end up some of those ones that falling out, and we'll be able to pick up some incremental volume. And as I said, when you look at our pipeline and the locked pipeline more importantly for what we're seeing now in January, it's equally as strong as what we saw in some of third and fourth quarter. So I think the first half of the year for our mortgage shops is going to be less impactful than many others. But that being said, we will certainly, just like others, see the pull back in the refi activity as rates increase. But all-in-all, I think from a materiality standpoint, it's hard to predict what the market will look like after the first half of the year. But I can tell you the housing market is extremely vibrant. We see it both on the construction side and on the mortgage side, and we will continue to capitalize on that. And what really makes our story different to this when you look at the growth markets we operate in with a ponderous of our mortgage activity. So I feel that ours will not be -- I think a lot of people are anticipating this cliff dive and I do not see that happening with our mortgage operation and the way it's set up. And you can see the margin this quarter. Robert Odom and his team did an excellent job of maintaining the margin. In fact, it improved. So that's a big kudos to them and the efficiencies too that we have garnered through robotics and automation, that's really what's going to be the differentiator as we go forward with other mortgage shops is our ability to continue to generate volume with less expense. Because right now, the expenses are inflated because people are drinking through a fire hose. But as that slows down, that's where you're going to see a lot of disparity I think between mortgage shops. Does that answer your question, Brady? I know it was a longwinded answer, but I hope that gives you a little color.

Yes. No, that's great, Palmer. I wanted to ask next about the sale of the hotel loans. It looks like this kind of took the allocated reserve and charged it off, so there's not much of a financial impact versus the reserves you had already built against those lines. So I get it, but still it's an 18% on those hotel loans. Do you think that that loss content was real? And are you thinking about doing any other loan sales like that for any of the other kind of COVID impacted lending areas?

Yes, I'll answer that. There's two parts to your question there. Number one, if we didn't think it was real, we wouldn't have done it for starters. And many folks on the phone that lived through the last downturn that are good and well and how that sector performed. And the way we look at it, we were able to do very selectively go through and call the portfolio and identify hotels that were struggling. And we looked at a lot of different factors, everything from the NSA in which it operated to the operators themselves, to the flag, and a lot of these, as you know, were some of our non-performing loans where we did not see a whole lot upside. And when you look back '07, '08 with hotels, and keep in mind back then the hotels were still open and operating. Today, they're still struggling. And we see the hotel sector is continuing to be stressed. And when you take into account a typical hotel and God forbid you have to foreclose on it, just going through the foreclosure process, then you've also got -- on top of that you got deferred maintenance you got to do. The property taxes are past due. You got to bring it current. You've lost the flag, because it's been dark. The operator has probably gone by then. And you look at the carry cost of that and the cost of capital associated with that. And then, when we look back at the '07, '08 timeframe, you look at the losses that were incurred on that particular asset type. If I told you back in '07, '08 that I could get $0.80 to $0.85 on the dollar for a hotel, you would tell me to jump all over it. And today, we feel like we have called the portfolio of those that we felt were stressed, extremely stressed, and do not anticipate any more sales. I think you'll find that there will be others that will be following suit, because it's a -- right now, there are some sophisticated operators out there that have the ability to buy these and pay a fair price for them instead of a distressed price. And as we look out into the future, I feel like these hotels in the economy in general, I think it's going to be much more of a gradual reopening, just as it was before it was kind of a slow decline initially. And we do not see the sector picking up dramatically in the near future. And as a result of that, we clearly identify this as an opportunity to capitalize on. So we did it.

Okay, that makes sense. Then finally for me just looking at the expense space, what sort of growth can we expect in expenses outside of mortgage banking? I know that will kind of depend on what you do on the mortgage side. But maybe just talk about kind of core expense growth. And then I know, Palmer, you hired a lot of talented people in 2020. Will that continue in 2021?

Well, on the C&I front, we were probably going to look to hire about seven or eight more C&I specific lenders. But one of the things that Matt [ph] and his team did an excellent job of last year is making sure that the existing talent we do have is also pulling its weight. And so we were able to reallocate some of those, that overhead expense into new lenders and we'll continue to be efficient with that process. But I do see us looking to hire another seven to eight more C&I lenders in the near future. And, Nicole, you can comment on any of the additional overhead expenses.

Sure. Brady, we are very, very confident of non-interest expense. And we closed additional branches in the fourth quarter. And then we didn't have those three kind of events in the fourth quarter, again, that we probably – we made a decision to make that donation and we made the decision to exit last year. So, we are trying to keep core bank expenses as flat as possible, especially really with potential margin squeeze and just everything, the uncertainty in the market. So we are very cognizant of planning for those places that we do need to spend money and we may need to reinvest, finding a way to pay for it internally through a reallocation of resources. We are still following that same strategy on the core bank. And then we feel like the mortgage banking side of mortgage banking origination pull back, those variable costs will pull back as well.

All right. Great. Thanks for all the color, guys.

Thank you.

The next question comes from David Feaster with Raymond James. Please go ahead.

Hi. Good morning, everybody.

Good morning.

I just wanted to start on production. Just curious, you guys had a nice pool of new hires announced a couple months ago. Just curious how much they're contributing at this point? And then I guess as they continue to ramp up, would you expect kind of production to accelerate in growth, hopefully to accelerate throughout the year? And then just kind of the pulse of the hiring market more broadly? Are you guys seeing any new opportunities still?

Yes, absolutely. And to answer your question more specifically, when you look at our pipeline for the kind of the core bank, which typically we'd like to keep that over $1 billion, I would tell you that right now, just about a third of that is specific to the C&I initiative that we have with the 10 new lenders. And when you look at that particular line of business or asset class, everyone look at it, C&I by definition is a longer build. So it does take longer, unlike a CRE loan where you get immediate growth. So there is a ramp up period getting individuals on board, getting them to move over business, and getting them up and running. So we've been very pleased. When you look at the breakdown of that pipeline, what we're seeing is about 60% of it is still coming out of Atlanta and then you got another 20% coming out of Florida and another 20% coming out of the Carolinas for the most part. But I think we'll continue to see that growth, because a lot of the hiring opportunities that we have seen as of recent have come out of quite frankly the Carolinas and Florida. So I think what you'll see is those areas will continue to grow and kind of catch up with Atlanta, so we're excited with that. And in addition to that, when you look at the seven or eight new lenders that we look to hire, we'll probably be adding those proportionately through those three states. But we're encouraged by what we see. But then again, you need to be patient when you're going to see an advocate. If you start seeing erratic growth there, you probably – it should create pause for you. But they're focused on middle market established companies. These are relationships, not transactions. And so I'm very encouraged by what we see and I'm glad we made the investment last year. Because to your earlier point, it does take time for that investment to start ramping up but we're encouraged about the production of the productivity we've seen so far. And when this economy opens up a little bit, I think that it will accelerate that opportunity.

Okay. And then just -- again, you guys did a great job using hires and team lift-outs to do some geographic expansion through some new branching and new markets. Just curious, where are you interested? Is that still attracted to you to doing some market expansion? Is it more attractive to do it de novo with some hires versus potential M&A? And just following up on the M&A commentary, could you remind us some of your geographic priority sizes that you're interested in and financial metrics, and even if -- what kind of deals you'd be interested in?

Yes, it's kind of a dual approach. If you look at it from the organic standpoint with Ameris, we are already operating in some of the top growth markets in the United States. So I will tell you what we need to focus there and do focus is capturing additional market share. Then if you look to expansion beyond that of our core branch footprint, you look at where our loan production and offices are. We got a meaningful office in the mid-Atlantic. I could see us expanding there and other types of loans and branching in terms of getting out of our existing footprint. But right now, when you look at Florida and you look at Georgia and you look at Carolinas and parts of Alabama that we're in, in a meaningful way, there's plenty of opportunity there. And so the phase two of that would be looking at some of the secondary markets. And I say secondary, that's where we would have primarily LPOs. Then the second strategy would be through M&A where you would be in an entry into a new market as a result of an acquisition perhaps. But I would tell you that's kind of the order of the priorities at this point.

Okay. And what kind of size range for a transaction would you be interested in?

Well, as we've said all along and been very consistent, probably anything -- nothing smaller than that $3 billion.

Okay. And then just on the fee income front, just curious where are we in the process of reinstating some of the waived fees? And I guess, how do you think about these going forward? The counter cyclicality of mortgage has obviously been a huge help. Just curious how you think about the other lines? Are there anything that you'd be interested in expanding into new lines coming in or even thoughts on expanding like the premium finance and just the scalability of some of your other fee income lines?

Yes. Premium finance has been a homerun for us this year. It's a very stable, steady source of income. And if you do it right, it's got very low risk in terms of credit risk. That is an area we will continue to grow. And we're focused primarily on a lot of the smaller agencies there, which I think there's a lot of opportunity to go after that business. And we've got a major focus on that for 2021. The wealth group, which for us includes private banking trusts and investment management, that's where I see some additional opportunity and even along the lines of potential acquisition type of opportunities to develop that, because that's good fee income. It too is an investment and it takes time. But that may be an area where there will be opportunities as we go forward to look to expand upon that fee income. From just a core service fee income when you look at the bank and fees related to accounts, I think across the board, you're reading a lot of reports that I'm reading that show that there's been an increase there. And I think that will continue as the economy opens back up. We all saw and experienced the pull back, and we're obviously a lot more sensitive to fees. But I think you'll start seeing the service fee income for banks increasing as we go forward and the economy opens back up.

Okay, that's helpful. Thanks, everybody.

The next question will come from Jennifer Demba with Truist Securities. Please go ahead.

Thanks. I think most of my questions have been covered, but Palmer when you think about expense reduction opportunities, how do you think about branch rationalization right now given you seem to be operating pretty well with the lobbies closed?

Yes, we are. And I think, as an industry, we've all benefited from being forced quite frankly to step back and look at that whole operation, the retail delivery operation. And banks traditionally are very slow to move and adapt and change. And I think it's more of a herd mentality. And I think the herd is moving. I think that will help a lot of folks that have been reluctant to make some of these changes. But when we look at our numbers, and we had a Board meeting yesterday and we're going through a lot, even the teller transactions. Teller transactions are still about where they were before. And what that tells you is, is that the draft rules are sufficiently servicing the customer base. And you compound that and combine that with digital technology and effective new account opening process and the user experience, that's what we're all about here is investing in that heavily over the next year or two, because that's what it's going to all come down to. Because if you're trying to divert traffic or customers to another line, or a way to come into a company, you need to make sure that that way is equally as even or appealing to them as the other walking in a branch. But I think that what we've found just from -- we've been pretty proactive in our branching in terms of branch closures and open to the drafters. I think what you will find is many branches will continue to keep the drafters open, but the lobbies will remain closed. And then you look at the talent within those branches and allow that talent to be utilized for us as we've grown so quickly in other areas, like the call center, we've got a number of those same branch folks, they're dedicated to our PPP program right now and will be dedicated to forgiveness for that. So I think a lot of that talent can be utilized at other places without having to hire talent elsewhere. So I think at the same time, you can look through processes and efficiencies and allow -- if you're growing to absorb a lot more of those costs or efficiencies rather than just adding additional overhead. But branching into -- I'm still a believer in having branches, but I think it can be a much more efficient footprint and much more efficient use. We've touched on earlier the need for wealth management and mortgage and turn into more into a destination center for an experience rather than just a transaction. And that's kind of the approach we're taking to our whole branch network as we look through it.

Thank you.

The next question will come from Kevin Fitzsimmons with D.A. Davidson. Please go ahead.

Hi. Good morning, everyone.

Good morning.

Nicole, I understand that the margin did better than that prior guidance of low to mid single digit compression. Just wondering if we can pivot and look forward now. So is that still the outlook from here? And I know there's a lot of different factors. I'm assuming that's just the core margin you're talking about X accretion and X PPP fee accretion as well. So maybe if you can kind of start there on what you're thinking about the core margin, what you're thinking about accretion contribution? I know it came in this quarter. I know that's a tough thing to predict, but just where you think that might be. And then if you could touch on PPTP fees in terms of what fees -- how much fees you have remaining? And is it reasonable to assume the round one fees get mostly taken up or recognized in the next two quarters? Thanks.

Sure. So I’ll answer the last question first, because that is actually is going to lead right into the answer of the first one if that’s okay. We had about $41 million remaining of the original, the PPP kind of round one. We’ve got $21 million and I think that is -- we said that we expected, while we are amortizing demand as a contractual maturity with the two years for all of our internal modeling, we were using a one year horizon. So that would really kind of be the end of the second quarter. So I think that is a very logical assumption to assume that that 21 million or most of the 21 million. There will be some that extend out, but the majority of that will come in, in the next two to maybe two and a half quarters. So knowing that, we do have that coming in on the margin and that is what helps protect it a little bit in the fourth quarter. Kind of moving forward to what margin going forward, there's several things that are going to affect that, and has already started to affect it. So loan growth, liquidity, PPP forgiveness and deposit costs. So we just talked about the PPP forgiveness and the potential there. Loan growth, we'll talk about that in connection with excess liquidity. So we have about $1.5 billion of excess liquidity on the balance sheet at the end of the year. And we always have excess liquidity at the end of the year. We have cyclical deposits that come in. So if I'm looking at how do I -- how do we use that liquidity or how do we put that to use? So we have about $0.5 billion, 500 million of cyclical run off of deposits. We've already had about 300 million of that run off in January. We expect another 200 million in the first quarter. That's kind of our -- again, we have a lot of public funds that come in right at the end of the year and that goes back out in the first quarter. Then we are estimating -- we're kind of guiding 300 to 700 is our expectation for PPP round two, so assuming that comes in at 500 million. And then we've got about 300 million identified in the bank and through premium finance. So that really leaves us about 200 million is what I'd call excess liquidity. And that is where we think we have some additional opportunities for some strategic runoff on the deposit side, and it was either from rate reductions or runoff on the deposit side. Looking forward or in terms of giving guidance before on our CD pricing, we still have some opportunity there. We have about $500 million of CDs that re-priced in the first quarter. They're currently at 112. Last quarter’s production was about 30 basis points. So if we can keep our production to that 30 basis points, we've got an improvement there. Second quarter, we've got another 0.5 million, that's 70 basis points. And then we had about another 400 million in the third quarter. So we do have some offensive plays there on the deposit side and we are still looking at -- we have some to the point now of just some specific money market narrow accounts that are outside of the norm. I think our board rates are about as low as they can be. Depending upon that liquidity and how we are able to deploy that and the execution on that deposit costs, the first quarter margin compression we're thinking to be in the 5 to 7 basis point range. I hope to beat that again. But that's kind of where we anticipate it coming out. That was a long answer in detail, but I hope that answers your question.

No, that’s great. And just to clarify, so that includes PPP fees, that 5 to 7 down or it does not?

It does. And so depending upon how much of that comes in the first quarter versus the second quarter, that could vary -- that could get us down. If more of it comes in, maybe we hit in the 3 to 4. But if less of it comes, then maybe we're in the 7.

Got it. Okay, very helpful. Thank you very much. Just one quick follow-up question on the consumer portfolio, 119 million that’s transferred to help the sale. What is that portfolio and why was it shifted over there?

Sure. So that is kind of an ancillary product that we bought several years ago funding through a third party. And we were getting out of that line of business. And so we have gotten bids on that. And so they are held for sale. We anticipate that essentially selling in the first quarter. That was an intentional decision for us to sell that.

Great. Okay. Thank you very much.

Thank you, Kevin.

The next question will come from Brody Preston with Stephens Inc. Please go ahead.

Hi. Good morning, everyone.

Good morning.

I just wanted to ask Nicole just more specifically on expenses. You all have done a good job sort of growing the core bank, core C&I and CRE this quarter, the growth was pretty strong. But sort of excluding the Foundation contribution and the FDIC termination, expense is running pretty flat on the core expenses. And so just given all the new hires and given the growth trajectory moving forward, I was wondering if you could speak to specific things that you've done to help sort of offset some of the investments that you've made, just because you're growing the core bank, but the core expenses aren't necessarily following suit?

Yes. So we've done several things there. One, we did the branch optimization, so we closed additional branches on October 1. We have one additional branch that has closed so far in January. So that's kind of the branch optimization update. We certainly and we said when we did that, that we were going to use those resources to pay for some of these other things. All of the new hires, they really came in kind of in the third quarter. And so fourth quarter, those expenses are in our fourth quarter run rate. We've also implemented some things on the technology side and the innovation side. We started using some robotics and some AI. And we started that in mortgage and we probably could have made a better decision there, because we did that first quarter of last year not knowing what was about to happen. And so that certainly helped drive the efficiency in the mortgage division. Not only did they have the increased production, but they also had an improving efficiency ratio because of that technology. So we started to deploy that through other areas of the bank. And then we also -- we've done some, and I think every company has done this at some point in their history where they just opened it up to employees and say, help us and we're going to help you benefit on kind of doing some cost initiatives there. We’re asking people if you're doing things that don't make sense, raise your hand, and we'll find out why. Or if there's a better way to do things, don't be scared to raise that question. And we've had a history of cost savings. I remember when our efficiency ratio was in the 70s. And when we said we were going to get in the 60s, and then when we said we're going to get to 50s. So it's almost become part of our culture. The word that we use a lot is discipline. And if you need to spend money, let's figure out a way to pay for it. And then I think we've also definitely had the message of if we're going to have margin compression and the uncertainty in the market, now is the time to really, really look at where we're spending. It's about -- it's just kind of a culture as well, and just looking at it and deciding where are we going to spend on that dollar and where do we get the best return on that investment dollar.

Brody, I’ll echo some of Nicole’s comments there. She's right on in terms of we've gone through and continue to go through and I think that's one of the challenges all companies have a need to continuously do it, not periodically do it, is look at your lines of business. Look obviously for inefficiencies that you can eliminate but also look at the materiality of what you're doing there. Could it ever get to a scale and size that we’re providing meaningful return? The held for sale portfolio she mentioned, that's a fine portfolio. But in and of itself, it's never going to move the needle, it's never going to be that material to what we do. And you look at the resources that are associated with maintaining that portfolio relative to where we can make reinvestment in other parts of the company with a higher return on invested capital, that's really what we're looking at as we go through and dissect each sector of the company. So I think you'll find more and more activity like that and continued activity from Ameris as we kind of go through and find this kind each year in the company. And that's how we kind of came up with a decision on hotels and had a conservation on the held for sale. That's how we come up with a revise for the mortgage. And you'll see that kind of mentality throughout the company as we go through for the remainder of the year.

Okay. Thank you. And so just as I think about growth in that core expense, the core banking expense from here, assuming that you'll continue to make some tweaks, then would it be safe to assume kind of a mid single digit growth rate from here just given the longer trajectory?

Yes, very low single digits.

Okay. Thank you for that. And then I guess just one last one on expenses. Assuming that we kind of get mortgage production to go back down more towards 3Q '19, 4Q '19 levels at some point here in the back half of '21 and into '22, would it be safe to assume that the expenses, would that head back towards 3Q '19 and 4Q '19 levels as well?

Yes. It could even be a little bit better just based if you think back to 3Q and 4Q of last year. We were still in the middle of the Ameris and Fidelity integration. So we still had some dual systems and we also didn't have the robotics in place. So they've done a tremendous job improving their efficiency ratios. So that's definitely where we expect those variable costs, but then also you'll see some of that efficiency.

Okay, great. And then, I'm sorry if I missed it, but you had a big ramp up in cash this quarter. I wanted to know is some of that transitory or if it wasn't, what do you plan to do with it? Just because when I look at the securities book, it's running at 5%. And I think it was at 9% sort of after the LION deal closed. And so I wanted to ask, do you envision building this book at all in the near term?

That's a great point. So we do have excess liquidity. And just historical Ameris, we had some excess deposits that typically come in through our municipalities and also through some of our ag that we had about $500 million of excess liquidity that we anticipate will run out in just deposits that come in the fourth quarter and basically go back out in the first quarter. We've already had about 300 million of that run off in January. We anticipate another 200 million. So when I think about excess liquidity, I see about 1.5 million of excess liquidity. About 500 million of that will be those excess deposits to run off. We've got about 500 million earmarked too for the new PPP round, about 300 million for the bank and premium finance growth. And then about -- that really raises about $200 million to either have, if we can have an additional loan growth but obviously be the preferred methodology, but we need to keep it safe. I'm looking at Jon through that message to make sure that it fits within our credit criteria. But then also we have some opportunities from what we would call strategic run off of some certain deposit accounts. Again, we run off just about all of our non-core funding, our funding where it’s now almost 97% of our funding in core bank deposits. So we've run out just about everything else we can that we've got about 200 million that we could potentially run off or just reduce the rate.

Okay, understood. So it doesn't sound like you feel a need to build in the securities portfolio at all.

Not necessarily right now.

Okay.

That would be our last resort, I guess. We just don't want to give [indiscernible] at this point with the rate environment right now.

And it’s an opportunity to call too obviously, because we have that in --

Okay. Palmer, you mentioned just on the mortgage real quick, you mentioned the mix of Ameris being traditionally stronger towards purchase. And so I just wanted to ask what that mix was purchase versus refi in 2020?

We're running right now at 58%. Traditionally, we had run in the 90s, high 90s. And so I think that's what you’ll see it migrates towards. And as I mentioned, we saw this during the last mortgage wave is that as refi has pulled back, then that's when core mortgage companies like ours actually garnered market share. Because when people pulled out of a business or closed up shop and waited for the next wave to come, that's where we end up picking up incremental volume in terms of primarily purchasing if there is any refinances left. But right now we've got capacity in terms of the efficiencies that we put in place in the robotics to layer in additional production. And right now I will tell you too, there's this fluid in the market and it's full of the pipeline with a lot of these originators, there's still some movement out there and I think we've got an opportunity in some select markets that will be focused in on to bring in additional talent and production.

Okay.

So that will offset some of that run off. And once again, our focus when we're looking for originators is people with a strong purchase background, not a rebound background.

Okay, understood. On the hotel sale, I wanted to ask it looked like you might not have had an existing mark on this, just given the specific reserve for the quarter was 14 million. But were there any -- maybe at a small reserve, were there any specific reserves set aside for any of those loans before you sold them?

Yes, there were, because they were some TDRs in that mix and non-accrual loans in that mix. By the end of the third quarter, we had both the FAS 5 and some more 14 reserves associated with that portfolio.

Okay. And then, Nicole, the production yields 386 at the core bank, you've seen a steady sort of -- it's not surprising, but a steady decline here the last couple of quarters in that production yield. Where do you see those going in the first quarter?

I would anticipate and certainly hope that they stay stable at this point. Again, the best offense to that or defense to that it rate deposit cost to continue to watch those as well. But the trend so far is still flat.

Okay. And just two left for me. When you look at your customer base, you guys have done a pretty good job on NIB historically, but like the core C&I portfolio is not a relatively large portion of the loan book. And so I wanted to ask, when we look at your customer base, where does most of your non-interest bearing deposits come from?

Believe it or not, they come from our commercial base, even though albeit small, that's where the majority of the deposits come from.

Okay.

[Indiscernible] growth of what we’re investing in here and especially as it pertains to treasury management side. And I think for all balances is the enhanced treasury management feature that helps accelerate the potential for additional deposits.

Okay. Thank you. And then, Palmer, I heard your response early on M&A, but I just wanted to ask again about the size of potential targets and your thoughts around any potential mergers with equals?

Yes. I would tell you the same answer I gave before that we looked to target with many smaller than $3 billion. And anything we do, we've got a pretty good thing going here at Ameris. As you can see, we've had a wonderful year. Anything we do needs to be accretive. And anything we do is to be meaningful. And if you go down the line of a MOE type of discussion where one plus one would always need to equal three or even consider something like that, you have to have -- because what we don't want to do is get in a situation where we're doing something that's pulling back on our financial performance. So we've always prided ourselves on being a top tier performer. And so we've had to find somebody of an equal mindset that’s set on making sure that we retain the same level of performance. But right now, the nice thing that we've been able to show the market and enjoy ourselves too is that aside from M&A -- if we don't do M&A, we've got tremendous earning power here in this company. And if we do M&A, it would be just icing on the cake for us.

Understood. Thank you very much for taking my questions. I appreciate the time this morning.

The last question today will come from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Hi, Palmer, Nicole. Just to follow up on the mortgage margin. I note the comments earlier. Just curious at the history of Ameris and Fidelity before that. If that margin really is not relevant in terms of history, that it's a new paradigm for you given the changes you're making, which means that perhaps the downside is there some, but not as low as it had been historically?

Yes, like a lot of things, I think it's an enhanced discipline. I think that both Ameris and Fidelity have always run good mortgage shops. But I think the focus there that Robert Odom and his team has put in place to integrate it -- margins are not going to hold as well as they have as we noted before, but he's done an excellent job of maintaining those margins. And I think as long as the volume is there, that helps keep those elevated. When the volume pulls back up, you'll start to see margins pull back. But it is a new focused discipline that we have and we're seeing that throughout the company. And so while there was a control in place or discipline in place, it's just more enhanced now. And I think that's what delivers that improved margin, and his efficiencies that he's garnering throughout his operation.

Great. Thanks for that. And are there still opportunities to hire more producers on the mortgage side?

Yes. As I’ve touched on earlier, we've got opportunity there and we'll be making that happen in short order. We've got some upcoming opportunities. So they'll be continued growth in that -- new hires in the mortgage shop.

Great. Thanks very much for all the time this morning.

Okay. Thank you.

This will conclude our question-and-answer session. I would like to turn the conference back over to Palmer Proctor for any closing remarks.

Great. Thank you, Grant. And once again, I want to thank everybody for listening in to our fourth quarter and full year 2020 earnings call. As we look forward in 2021, Ameris is extremely well positioned for the future. And we look forward to talking to you next quarter. Thank you.

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