Ameris Bancorp (ABCB) Q3 2021 Earnings Report, Transcript and Summary

Good morning or good afternoon, all and welcome to the Ameris Bank Third Quarter Earnings Conference Call. My name is Adam and I will be your operator today. [Operator Instructions] I will now hand over to Nicole Stokes, Chief Financial Officer to begin. So, Nicole, please go ahead when you are ready.

Great. Thank you, Adam. 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 website 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'll discuss the details of our financial results before we open it up for Q&A. But 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'll 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 website. 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 our 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 everyone. I want to thank you all for taking time to join us this morning for our third quarter 2021 earnings call. We were very pleased with the third quarter and the momentum that we have with the loan production, the growth and the financial results. Nicole is going to update you on some of the detailed results in a few minutes, but I did want to hit a few highlights for the quarter, as well as a few other successes, which positively impact our outlook as we go forward. For the quarter, we earned $83.9 million or $1.20 per diluted share on an adjusted basis. And this represented a 1.51% return on average assets and a 17.65% return on tangible equity. For the year-to-date period, we earned $287.2 million or $4.12 per diluted share on an adjusted basis, which is a significant increase from the $2.86 reported in the same period last year. The 2021 results represent a year-to-date ROA of 1.79% and the year-to-date return on average tangible equity of 21.38%. Our adjusted efficiency ratio this quarter was 56.56%, an increase from the 54.07% last quarter due to certain non-recurring expenses during the quarter. And that said our year year-to-date efficiency ratio is 55.05%. It should return below 55% by the end of the year. We remain very encouraged by our organic growth, both on the loan and deposit side and exclusive of PPP runoff loans grew over $250 million or 7% annualized during the quarter. And that leaves our year-to-date annualized loan growth at 8.7% and excluding PPP runoff in 3.2%, including PPP runoff. We still expect to see mid to upper single digit loan growth for the year based on our pipelines and opportunities within our growth markets. On the deposit side, we continue to see a lot of success there and growing non-interest bearing deposits, which now account for over 40% of our total deposits. Nicole is going to discuss our excess liquidity and the impact, obviously it has on the margin in more detail in a few minutes, but I did want to mention the continued success we have there on the deposit front. On the capital side of the balance sheet, our capital position remained strong. We've consistently said that we're very focused on tangible book value growth, and this quarter was no different. I'm happy to report. We grew tangible book value by over $1 per share or 3.8% during the third quarter alone. And we'd grown tangible book value by $3.77 or almost 16% for the year so far. And this equates to over 20% annualized growth rate and tangible book value, which is very meaningful. Our TCE ratio increased to 8.8%, very close to our 9% goal. And if you exclude the $3 billion of excess liquidity on our balance sheet, the TCE ratio would have been well over 10%. So, clearly, we have ample capital support our growth initiatives and consider opportunistic transactions. While we remain focused on capital preservation, we did announce as many of you may have seen in our release that our Board approved extending our share repurchase program through October 31st of next year. We did repurchase 6.5 million during the third quarter. And that leaves approximately 79 million left on that program. And while we don't anticipate executing on this during the remainder of 2021, we do like having the optionality that the right opportunity presents itself. As our dividend, we still remain very comfortable with where our dividends are today. Jon Edwards, our Chief Credit Officer is with us today, and he's certainly available to take any credit questions after our prepared remarks. But I wanted to hit a few highlights in terms of credit. For the quarter, we had net recoveries of $127,000. So the zero charge-off ratio compared to 2.6 million of net charge-offs last quarter seven basis points. Our non-performing assets as a percentage of total assets was consistent with last quarter 32 basis points. Loans that remain on deferral at the end of the quarter were approximately 0.6% of total loans, which down from approximately 4.3% of total loans this same time last year. Our allowance coverage ratio, excluding unfunded commitments was 1.18%, net of our PPP loans at the end of the quarter. And I'll tell you, despite the uncertainty, that's still in the economy out there, we continue to see very strong asset quality and solid growth opportunities in our markets for the remainder of this year and the investments that we made last year and over the last 18 months in both technology and talent continue to propel our incremental growth and really helps us to further leverage our platform. And that certainly has helped us eliminate any dependency on recent hires or future hires to deliver our growth targets. And that's a meaningful distinction for our company. But I'll stop there and now turn over to Nicole to discuss our financial results in more detail.

Great. Thank you, Palmer. So, for the third quarter, we're reporting net income of $81.7 million or $1.17 per diluted share on an adjusted basis. We earned $83.9 million or $1.20 per diluted share when you exclude the servicing asset impairment, the loss on bank premises and the merger charges. For the year-to-date period, we are reporting net income of $295 million or $4.23 per diluted share on an adjusted basis. We earned $287.2 million or $4.12 per diluted share when you exclude those same items I just mentioned. We were pleased with our operating ratios. Our adjusted return on assets in the third quarter was 1.51%. And our year-to-date adjusted ROA was 1.79%. Our adjusted return on tangible common equity was 17.65% for the quarter and 21.38% for the year-to-date period. As Palmer mentioned, tangible book value increased by $1.01 or 3.8%. That was from $26.45 at the end of the second quarter to $27.46 at the end of this quarter. For the year-over-year comparing September 30 last year to September 30 this year, our tangible book value had increased $5 per share or over 22% from $22.46 this time last year. In addition, our tangible common equity ratio increased five basis points to 8.88% million. This increased 61 basis points over the past year from 8.27% this time last year. We have approximately $3 million of excess liquidity on our balance sheet, and that negatively impacted this ratio by 144 basis points. So, if you took that cash out of our assets, our TCE ratio would have been about 10.32% at quarter end, which was well above our stated target of 9%. We continue to be well capitalized, and we feel comfortable with our capital and dividend ratios. Moving onto our net interest income and the margin. As you can see on slide eight, our net interest income has remained fairly stable since last year. But the thing that we're really proud of, if you look at our net interest income, exclusive of accretion and PPP kind of getting to that core NII, it increased $3.4 million this quarter over last quarter and $1.7 million this quarter over the last -- this time last year. And that shows a real positive trend as people have wondered what happens when PPP runs off. Our net interest margin declined by 12 basis points this quarter from 3.34% to 3.22%. Our yield on earning assets declined 14 basis points, but our funding costs helped offset that by two basis points. When we look at the margin, we really have four factors. So eight basis points of our margin squeeze came from our excess liquidity that continued to add this quarter, three basis points came from compression from the -- or three basis points of the compression came from the $2 million decline in PPP income, and then there was another about three basis points of decline related to the accretion income decline. And so that's about the 14 basis points of asset compression offset by two basis points of improvement in our funding costs. So the point there is, excluding the excess liquidity, our margin would have only declined about three to four basis points for the quarter. And all of that is attributable to the PPP and accretion decline. Also on slide eight, you can see the table to the left, the $3 billion of excess liquidity and what it's done to our margin ratio. It accounts for about 42 basis points total of the negative compression from one year ago. So, we remain focused on our deposit costs, and we continue to grind them down. We still have some room for improvement in the CD portfolio, but the real driver to an improving margin is putting that excess liquidity to work. We continue to anticipate net loan growth net of PTP activity next year in the high single digits, kind of that 7% to 9% range, which is about $1 billion to $1.3 billion of loan growth. That leaves about $1.8 billion of excess cash to prepare for our deposit runoff. And then also to begin buying investments and to fund opportunistic if other investments become available. Moving onto provision. We reversed about $9.7 million of provision expense for the quarter, and that really was due to an improvement in the economy, specifically home prices and the CRE index and then our own improved credit quality this quarter, with that Palmer mentioned the recovery versus charge-offs helped offset the need for additional provisions on our loan growth. Our ending allowance for loan losses was $171.2 million compared to the $175.1 million at the end of last quarter. And including the unfunded commitment reserve and allowance for other credit losses, our total allowance for credit losses was $188.2 million at quarter-end. Non-interest income declined $12.7 million this quarter due to decreases in mortgage banking activity. As shown on slide 11, the retail mortgage originations now represent 17% of our pre-provision pretax income for the third quarter, and that was down from 49% this time last year. Production in the retail mortgage group declined about 14% to $2.1 billion for the quarter. And similar to last quarter, our non-interest expenses declined about 8% or $4.4 million in the retail mortgage division. The average gain on sale increased to 3.17% for the quarter compared to 2.77% last quarter. And the open pipeline -- this is encouraging -- the open pipeline at the end of the third quarter was $1.9 billion compared to $1.7 billion at the end of the second quarter. Total non-interest expenses increased by $1.4 million from the $135.8 million last quarter to the $137 million this quarter. But excluding the loss on bank premises and the merger charges, non-interest expense actually declined $120,000. As I mentioned, mortgage revenue -- net mortgage expenses declined about $4.4 million during the quarter, but those savings were offset by increases in other areas, including enterprise-wide services and support staff. A lot of those increases -- the majority of those increases were related to increased legal and professional fees and other one-time expenses that are not expected to be recurring. Because of these non-recurring expenses, our adjusted efficiency ratio for the quarter was 56.56% versus 54.7% last quarter, but we do expect that it will return to under 55% by the end of the year. On the balance sheet side, we ended the quarter with assets of $22.5 billion compared to $21.9 billion at the end of last quarter. We really were pleased with our organic loan growth of $43.7 million, which is above 1% for the third quarter. But as you can see on slide 16, we had $471 million of headwind against $515 million growth in CRE, C&I, premium finance and residential. PPP loans declined $208 million and indirect loans declined $72 million. So, excluding that PPP runoff, our loan growth was about 7% annualized. We have about $280 million of PPP loans left, and we have about $325 million of indirect loans left. So, we really anticipate the headwind from the runoff in both of these portfolios to subside early next year. While I'm on TPP, just a quick update there. We've received payments and forgiveness of just over $1 billion on round one, leaving the outstanding balance there at just $21 million. And then the round two, we have a balance of about $259 million. The average balance of PPP loans in the second quarter -- I'm sorry -- in the third quarter was $377 million compared to an average balance in the second quarter of $708 million. We have about $14.7 million left of deferred fee income on the PPT loan, which, again, we anticipate amortizing into income over the next three quarters. So, we already discussed the excess liquidity that you can see in our other earning assets on the balance sheet due to the tremendous deposit growth we saw this quarter. Deposits grew $575 million. But the real key here is that non-interest bearing deposits grew $633 million, and our interest bearing decreased about $58 million. As Palmer mentioned, our non-interest bearing are now over 40% of our total deposits. This is just really key as our bankers have continued to grow non-interest bearing deposits to fund that future growth. And I said last quarter, we do anticipate some deposit runoff as life starts to get back to normal post-pandemic and as rates potentially rise. So with that, I will wrap it up. I appreciate everyone's time today. I want to turn the call back over to Adam for any questions from the group.

Thank you. [Operator Instructions] Our first question today comes from Brady Gailey from KBW. Brady, please go ahead.

Hey. Thanks. Good morning, guys.

Good morning, Brady.

I just wanted to start with mortgage fees. If you back out the noise related to the MSR, mortgage fees were down about 17% linked-quarter, which is a little more than I thought they would be. So, maybe just any kind of comment on that decline? Did it surprise you guys? And how are you thinking about mortgage as we head into 2022? I know it's a tough thing to predict.

Sure, Freddy -- Brady. The -- sorry about that. We're learning a new system on our end with the conference call. So, I picked up the round name, sorry, Brady. So, on the mortgage revenue side, a lot of that has to do with timing and the large production that we had in the second quarter and the acceleration of some sales in the second quarter. So that did drive down a little bit. It's not necessarily the third quarter -- it affected the third quarter because the second quarter was so elevated, that timing issue. So we do -- as I said, the production was down about 14% and revenue was down 17%, but some of that again was the timing issue. So, we anticipate that pair-off that we discussed in the press release to go back up a little bit next quarter, and it should rebound.

And more importantly, too, Brady, I think everybody saw the improvement in the margin there. That bounced back to over 3%, we were down at 2.75%, I think, last quarter. So, between the production and the margin, we feel very positive about fourth quarter in terms of mortgage, but a lot of mortgages, as you all know, is about timing, and we had the opportunity to have some meaningful sales at the end of second quarter that obviously impacted third quarter.

All right. That's helpful. And then, Nicole, I noticed that other expenses were up about $7 million linked-quarter. Was there anything notable in other expenses this quarter?

We did. We had some one-time, what we call our one-time expenses. We settled an old legal suit. So we had some additional professional fees related to that and then the settlement. And so, we don't expect those to recur. And then, we also had -- like we talked about the -- some lease expense that we're getting out of. And then also the state tax, if you notice our tax rate increased slightly this quarter. That's due to a state tax liability. That was just a one-time thing and that we expect that to go back as well.

Okay. All right. And then, the last one for me. I know we've talked about an efficiency ratio of 53% to 55% for you guys. Is that still the way you're thinking about it as we head into 2022?

It is. We are still targeting below 55%.

Okay. Great. Thanks guys.

Thank you.

Our next question is from Casey Whitman of Piper Sandler. Casey, your line is open. Please go ahead.

Good morning.

Good morning, Casey.

Good morning, Casey.

Good morning. Just wondering, maybe if you can give us sort of how we should think about if we look at just the core net interest income without PPP and without accretion, sort of given your growth -- loan growth outlook for next year, sort of what's a reasonable outlook for -- what we could see growth in that core and net interest income next year? Is it kind of mid single digits? Or is that too low?

So, thank you, Casey. I think a lot of that -- I'm going to talk real quick just kind of -- if rates are flat. That's one of the things that our bankers have done a tremendous job. And when you see this quarter and you see excluding that PPP and accretion, that we've actually been able to grow our NII. So, we do have a little bit more room on the deposit side. This quarter, we saw about two basis points of NIM defense coming from the deposit side. We still have a little bit more room there on mostly the CD side. So that should help stabilize some of the compression that we might see from the loan side. So, when you think about the yield curve steepening or -- and the Fed tightening, and we start to see maybe some upward movement there. We are asset sensitive and we've positioned ourselves that way. So, again, about 100 basis point move is about $44 million of NII increase for us. So, you can say as we really start to see that at about the 50 basis point bump when we start to get in between 25 and 50 basis points of improvement in the yield curve with the Fed move is when we'll start really seeing some increased movement on our NII as well.

Okay. Understood. And just to tighten up to the loan growth guide, I heard a mid to upper and then a 7% to 9% range. Is that -- is the mid to upper kind of how you're thinking about for this year and then potentially getting closer to that 7% to 9% range for next year? Just to be clear. Thanks.

That's right. That's exactly right. This year is kind of in that 5% to 7% range and then next year is coming in that 7% to 9%. And a lot of that is because of the headwind of the indirect and the PPP.

I am assuming out next year. I'll let some one else move [ph]. Thanks.

Great. Thank you, Casey.

Our next question comes from Kevin Fitzsimmons from D.A. Davidson. Kevin, please go ahead.

Hey. Good morning, everyone.

Good morning, Kevin.

Good morning, Kevin.

I was wondering if you could -- and apologies if I missed it, if you talked quite a bit about the margin and the drivers for it. Anything you can -- however you want to characterize it, reported margin, core margin in terms of how you're looking out over -- into fourth quarter and then into next year? And then, Nicole, I guess, I would -- a very important part of that, obviously, is the excess liquidity and what you do with it. So, maybe kind of a tangential question is, do you plan to get a little more aggressive on deploying it into securities? Or are you more content with if you see this loan growth coming, waiting for that to come? Thanks.

Sure. So, as far as margin, we did have the 12 basis points of compression this quarter. But when you look at it, you really have the eight basis points comes from liquidity. And so, then the remaining four basis points -- six basis points was on the loan side, but it really was all the PPP accretion income, it came down and then just our normal accretion income that came down offset by the two basis points. So, when you look at kind of a core margin run rate, we were successful in keeping that flat for the quarter, which I think is a huge win. I don't know that we're going to be able to do that again next quarter. I think we have another one to two basis points potentially on the deposit side that could offset a few basis points on the loan side. So, like I said, we really need rates to go up 25 to 50 basis points. Our coming on rates are lower than our margins. So there is a little bit of a drain right now, but we're doing everything we can on the deposit side to defend that. As far as the excess liquidity, we've got about $3 billion of excess liquidity. We've come to earmarked one to 1.5 in for loan growth next year. That gives us about 1.5 in to be ready to start deploying it into the bond portfolio, as well as to be prepared for deposit runoff. And then, if there was any other opportunities out there that we see in the second quarter, we did buy about $100 million of BOLI. While it doesn't go into the margin, it does go into non-interest income. So any type of -- those type of transactions, it could be opportunistic for us to use some of that liquidity. We really are continuing to hold off on the bond portfolio. We did start to buy some CRA investments in our in health to maturity bucket, but really being cautious on the held investment. Just -- we don't want to do something today that in six months from now when rates are different, we have a big impact to OCI. So, we're trying to be diligent and disciplined there. And just remember that if we can continue to grow that NII through the loan growth and through watching our deposit costs that we know that we can control the excess liquidity and the margin ratio and just really focus on the NII number and the growth there.

Great. That makes perfect sense. One additional question. I just wanted to get your -- Palmer, your updated thoughts on M&A. What -- and maybe if you can differentiate by bank or non-bank, we've seen a lot of banks get more interested in bolting on asset generators, given the excess liquidity. And if M&A is still as important, if maybe in this environment, you can go out and do team lift out and do strategic hires. Just wondering what your latest thoughts on that are. Thanks. Thanks, Palmer.

You bet. And I would kind of answer that in one wording. It's really optionality, and that's one of the benefits of our company here is that we've positioned ourselves to take advantage of opportunities. But that being said, as you know, we're pretty disciplined here, and things have got to make sense to do it. We're very sensitive to dilution. But to answer your question more specifically, we'd look at both banking and non-bank. And if we're able to further a particular line of business or do looked out somewhere, we will certainly entertain that as well. Because I think we can all see as we go forward the importance of not having a dependency on just the margin, fee income piece is critical, which is -- speaks well to our profile. When you look at the lines of business that we're in, whether it's the premium finance or the SBA or the mortgage. So, I think we could do things to further those existing lines in addition to potentially finding other opportunities for fee income on both the bank and non-bank side.

Great. Thank you.

You bet.

[Operator Instructions] Our next question is from David Feaster from Raymond James. David, please go ahead.

Hey. Good morning, both.

Good morning, David.

I just wanted to start on production. Overall production, you guys have done a really good job and held steady, just north of about $900 million in the past couple of quarters. I guess, how do you think about the ability to accelerate production going forward? Is there a -- we've talked in the past about the increased appetite to maybe move upstream? Does that potentially help? Or is it new hires that you talked about? Just curious your thoughts on that production side.

Yeah. I would answer it this way, David. We are very fortunate with the investments that I touched on earlier that we've made over the last 18 months, and there's very little dependency on betting on the comp for the future because we've got the right resources in place, and we're very fortunate to be in some high-growth markets. So, when you look at incremental growth for the remainder of this year and into next year, and the pipelines are still as they've ever been. So, I feel very encouraged across the board in all lines of business. And more particularly, in a lot of the new markets we're in, and that's both from a deposit and a loan production standpoint. So, I think for us, unlike many others, we pretty much know exactly where that production is coming from and the investments we made a while back were already hitting the stride. Because as you know, when you make investments in new talent, there's a ramp-up period. And that period for us -- we've already got a run rate, not a ramp-up period. And I think that will be a big distinction, especially when you look at some of the heavy growth markets that we're in. So, right now, as Nicole touched on in terms of our anticipation for growth. A lot of it is obviously driven by what happens with the economy and the political headwinds. But I feel very confident in our ability to continue to grow, and that has a lot to do with the talent and it has a lot to do with the growth markets that we operate in.

That's helpful. And then maybe just touching a bit on the competitive landscape. We hear a lot of competition on the pricing side. Obviously, new loan yields have come down. But just curious your thoughts on the competitive landscape from both a pricing and a structure standpoint. Do you think that's intensified at all? And then, do you -- I guess, on the pricing front, do you think -- it seems like there's more pressure on the variable side. Just curious whether the steepening of the curve is helping new pricing at all that we might be troughing.

Yeah. I think pricing is going to continue to be a challenge. In terms of structure, I will tell you, I don't see anybody in our peer group that's reaching on asset quality in terms of compromising asset quality, which is a good thing, because as we all know, can lead to major products down the road. So, from what I've seen out there, I don't see anybody reaching on or basically compromising on asset quality. What you do see along the lines of structure, there are some extended interest-only periods that are being offered. The non-recourse, you're seeing a lot more non-recourse, but at the same time you're seeing much more equity going into deals and stronger sponsors behind those deals. So, I think there's some mitigants there. The way we look at pricing is we're going to be very competitive if there's a relationship involved. If there's not and simply a transaction, that's very different. The other thing, I think, is a big distinction for us, just due to our ability to grow organically. When a lot of people are growing these portfolios, they have a dependency to depend on third-party indirect relationships and participations. That is not something we have a dependency on, and I'm glad for that, that I think can -- a bridge strategy there can become a permanent strategy, and we don't want to get ourselves into that situation. So, that being said, then you're going to have to fight for the business. And pricing, as we look forward, we'll continue to be very competitive on both the C&I side and the CRE side. But the only compromise I'm seeing right now is on structure in terms of really interest rate risk that you may be taking and then interest-only periods in non-recourse.

Okay. That's helpful. And then, just kind of following up on the M&A commentary. I mean there's a lot of discussions out there. Everybody's playing matchmaker. Just appreciate that you guys are coming at this from an opportunistic standpoint and don't need to do something. I guess, what's your appetite for maybe more of a transformative type acquisition versus some more of those bolt-on type deals? Just curious how you think about those.

Well, to your point, we've been extremely disciplined in our approach. And we are not against a larger type transaction, but having just been through an NOE here, I can tell you they're very difficult to implement over time. And so, you have to be prepared for those challenges. So, for us to get into something that would be along those lines, it would have to check a lot of boxes. And when you start looking at -- and we're very sensitive dilution, as you know. And so, when you go down that path, oftentimes it's going to be hard to find a partner in that regard. But that being said, we're not against larger transactions, but they would certainly have to be in keeping with our disciplines here.

Okay. Thank you. And Nicole, if I could just squeeze one more in. Could you -- appreciate the commentary on the one-time expenses. Could you quantify those? Maybe just give us any thoughts on a good core expense run rate going forward?

Yes. So, the tax piece was about $4 million. And then the kind of the one-time other expenses were about another $3.50 to $4 million.

Okay. Thank you.

Our next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is open.

Hey, thanks. Good morning. Palmer, Nicole, can you talk about new hires in both -- on all of the commercial, wealth and mortgage channels? Just curious kind of new staffing changes in the future?

Yeah. Thank you, Chris, for the question. The -- as I've mentioned before, we are fortunate in the sense that to hit our current projections for growth. We've got everybody we need. So, anything -- anybody that we add now in a way of talent is incremental growth and talent. And third quarter, in terms of the commercial front, we hired about five folks there. It was kind of evenly dispersed across the board in terms of commercial bankers, from Greenville to Atlanta, Jacksonville and Tampa. We have made some recent hires in the wealth department as well, that I think will be meaningful and that area continues to grow and the great fee income opportunity for the bank, especially as we expand into other markets. Mortgage, we're constantly hiring there. And so that's always active. But right now, the majority of the banker hires that we're seeing or the talent we're seeing, which is coming primarily from most of the larger regional banks is in the -- on the commercial front. And some of those are in our newer markets, the Charlottes, the Tampa. We're seeing some good opportunities there in addition to add some supplemental talent in the Greenville, Atlanta and Jacksonville markets.

Okay. Great. And then just a follow-up on the mortgage business. I know that the gain on sale was better this quarter, as you disclosed. I know it's a multi-quarter evolution on kind of some of the efficiencies in mortgage, but what's the progress there? And kind of how will that play out this next year?

Sure. So, we continue to look at the efficiency ratio in the mortgage group. And I think you can see on the mortgage side that we added -- that our expenses continue to go down with the revenues. And so, we had this quarter -- we did have -- because of those pair-off fees, but our -- they are still about 80% variable of our expenses. And so any kind of change in the production is what will drive that efficiency. And then we continue to look for other areas within mortgage to find some efficiencies.

Okay.

Chris, as we talked on last quarter too, technology is a big opportunity here and a big driver for all mortgage companies and ours included. We feel like we've got a good hit start on that, which really helped us -- propel us through the opportunities during pandemic. But that being said, as we go forward, we continue to find more and more opportunities for efficiency just in terms of how we produce. And then also looking at capturing more of the online type mortgage opportunities that exist as opposed to just through the retail network.

Great. And just to expand on Nicole's point. So, if you have a quarter or a year where production is not expanding, there's still opportunities to get the margin slightly better, just purely those efficiencies.

When you say the margin, so the gain on sale margin is not necessarily, but there is an opportunity for efficiency based on the production.

Okay. Two separate?

That's right. And so really, when you think about mortgage revenue, you've got two drivers, you've got production and gain on sale. And so a lot of the expense structure is based on the production and not necessarily on the gain on sale. So, if the gain on sale goes up, where -- obviously, the efficiency ratio will get better. But if the gain on sale goes down, there's not necessarily that driver on the expense side to stabilize it. But as production goes up or down, you have the expenses moving in line with that. So, it's certainly driven by the production side as far as the downward improvement of an efficiency ratio.

Got it. Thanks for clarifying that. I appreciate it.

Sure.

Our next question is from Brody Preston from Stephens Inc. Brody, please go ahead.

Hey, good morning, everyone.

Good morning, Brody.

Nicole, there is a line in the press release as it relates to mortgage that kind of caught my eye. You noted that there was an $18.5 million reduction in mortgage pair-off fees compared to the second quarter. And other of those fees are typically kind of charged to the sellers of mortgage loans if they don't fulfill their agreements. And so, are you all a buyer of mortgage loans before for securitization purposes? Like what is the -- what are those pair-off fees for you all?

Sure. And so no, we are not a buyer of those. And what that really had to do it is last quarter because of it's a timing issue. And because of last quarter, the overall production, and we accelerated the selling of some loans in the second quarter that we received some compare outs and excess, we were able to over fulfill some. And so, we've got the benefits of that last quarter, which is really that drives of that coming down this quarter. So, it's not necessarily that we were penalized this quarter. It's just that we had some excess or some additional last quarter.

Okay. Got it. And was any of that in the gain on sale margin last quarter? Or is that excluded from that?

It's excluded from that.

Okay. Understood. Understood. Thanks for that. Maybe just on the margin front, maybe try in this a different way. So, when I look at the HFI loan income and I stripped out the impacts of purchase accounting and PPP. Year-over-year, you all are down about 2.5% to about $145 million this quarter versus about $149 million, in the 3Q $20 million quarter. And I know that the new production yields are relatively challenging, but you all have grown core loans 5% over that period. So, I guess, help me think about the trajectory, I guess, maybe of loan income going forward, especially as new production yields seem to be coming on a bit lower. And when I look at the back book, at least for standalone Ameris, I know some of that change post Lion [ph]. But in 2018 and 2019, the banking division was putting on loans in the high fours to mid-fives kind of range. So, it just seems like a challenging ramp for loan income despite a strong growth outlook from here. So, how do we think about that?

No, I think you're exactly right. And like I said, our projections don't -- if you just take out any Fed rate or steepening there if the curve, that it's definitely an uphill battle, but our bankers have done a tremendous job, especially -- I mean, this quarter is a great example of that. So, while we continue to see the coming on rate below our current margin, and we continue to see that squeeze coming in on the loan side, we do have the growth to offset some of that. So, you make up some of it -- some of that lost revenue, you make up on volume versus the rate. And so, we continue to do that. And it's interesting when you look at kind of our coming on rates, our fixed rate production has been fairly stable over the last few quarters. It's that variable rate production that's lower. And so that will help us and helped us on the asset sensitivity side so that when rates do start to move, that piece of the portfolio will move as well and will help us in that environment.

Got it. Thank you for that. And then on the CECL side, you all notice that there -- you all noted that there was a $7.5 million decrease on specific reserves. And there were net recoveries in the quarter and gross charge-offs were only $3.5 million. So, I wanted to ask, what was it that drove that? I think there was a reduction in the hotel exposure this quarter. Was it related to that? Just wanted to get a sense for what happened there.

That's exactly what happened there. As we push further behind or ahead of the COVID impact, hotels -- certain hotel loans were showing improvement through the quarter, and they were removed off of the 2014 list.

Got it. Okay. And I think there was $49.3 million of the hotel exposure that was still on the watch list. Is that something where -- I think you guys did a pretty good job exiting some of the weaker relationships last year. Is that something where you continue to work with those borrowers? Or is it -- are those loans that you've kind of earmarked for natural kind of runoff as they mature going forward?

Well, really, what that is more a reflection of is some hotels were faster to heal than others. And so, we're kind of -- until we get pretty good clarity of the financial performance post-COVID, they're better and sustainable. We've left them on the watch list. So what really that is, is just sort of the remnants of hotel loans that have yet to really reach breakeven or better operating results, but not necessarily saying that we'll look to push those out of the bank, but they're just continuing to take a little extra time to get over the home.

Got it. Okay. And then, I just had one more. Nicole, if I could just circle back to those pair-off fees I had a question from someone. Should I -- should we expect those to be in the yearly run rate, like some of those pair-off fees tied to the excess production on a fairly lumpy basis quarter-to-quarter? Or is that something that is more idiosyncratic to that quarter, and it shouldn't be modeled going forward?

The latter. You're exactly right. And it really had to do with that push in the second quarter to accelerate some sales in the second quarter. And so, it's typically not as lumpy.

Got it. Thank you very much for taking my questions. Everyone I appreciate it.

Thanks, Brody.

This concludes today's Q&A session. So, I'll now hand back to Palmer Proctor for any closing remarks.

Great. Thank you, Adam. And I'd like to thank everybody again for listening to our third quarter 2021 earnings results. We remain well-positioned for the future as we stay focused and disciplined on growth and operating efficiencies and opportunities as we go forward to grow the franchise. And we really remain excited about the remainder of 2021 and into 2022. So, thank you all again for your interest in Ameris Bank.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.