Ameris Bancorp

Good morning and welcome to the Ameris Bancorp third quarter 2020 financial results call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead.

Great. Thank you, Eileen. 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 John 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. Before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainty, and the actual results could vary materially. We list some of the factors that may 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 GAAP financial measures in the appendix to our presentation. And with that, I'll turn it over to Palmer for opening comments.

Thank you, Nicole, and thank you to everybody who's joined our call today. We've got some exciting news to talk about this morning. You know, I closed last quarter's call with our new marketing campaign of Back to Business Together, and I think the third quarter results speak for themselves and reflect that commitment. Nicole's going to update you a little bit later on some more detailed financial results in a minute, but before we get there, I did want to share some highlights from the quarter as well as a few other successes we've recently had which positively impact our outlook as we go forward. For the quarter, we earned $116.9 million, or $1.69 for diluted share on an adjusted basis, which is up over 70% compared to the third quarter last year. This represents a 235 return on average assets and a 30.53% return on tangible equity. Our efficiency ratio improved under 50%, which is the first time in our history, down to 47.34% on an adjusted basis. For the year-to-date period, we earned $198.5 million, or $2.86 per diluted share on an adjusted basis, which is consistent with the $2.85 reported for the same period last year. The big difference being this year, we've also provided over $130 million more to the loan loss reserve than we did last year. And that's important to note. The 2020 results represented a year-to-date ROA of 139, and a year-to-date return on average tangible equity of 17.84%. We're pleased with the organic growth and that's both on the loan and the deposit side. Loans grew over 330 million or 12.2% annualized during the third quarter and that leaves our year-to-date annualized loan growth at 22.1% and that's including PPP loans and 11% excluding the PPP loans. We do have anticipated seasonal loan runoff in the fourth quarter. and that'll bring our loan growth closer to our original estimates of mid-single digits for the full year of 2020. On the deposit side, we continue to see a lot of success there in growing non-interest-bearing deposits, which is where our focus remains, and now we have accounts that non-interest-bearing accounts equate to over 36% of total deposits. As for capital, we've said for several quarters that we're focused on capital preservation, growth in TCE and growth in tangible book value, During the third quarter, we grew both TCE and tangible book value by over 7%, which is very meaningful. As you know, this quarter we successfully issued $110 million of sub-debt at a low rate of 3.78%, and this will positively impact our total risk-based capital ratios by approximately 60 basis points. While we remain focused on capital preservation, we announced in our release this morning that our board did approve extending our share repurchase program through October 31st of next year. While we don't anticipate executing on this during the remainder of 2020, we do like having the option to repurchase our shares if the right opportunity presents itself. As for our dividend, we remain comfortable with where our dividend is today and do not anticipate any change at this time. Moving on to credit, John Edwards, our Chief Credit Officer, is with us today and he's available to take any questions after our prepared remarks, but I did want to hit a few highlights in terms of credit. We do believe that the heavy lifting of the reserve is complete now barring any further economic downturn and additional provision expense would solely be related to deterioration specific credits. This brings our allowance coverage ratio including the unfunded commitments to 1.48% net of PPP loans. Our annualized net charge off ratio was 10 basis points of total loans and that compares to 27 basis points last quarter. Our MPAs as a percent of total assets increased to 83 basis points compared to 59 basis points last quarter, mostly due to the increased non-accrual loans in the residential real estate and commercial real estate loan categories. And finally, the loans that remain on deferral at the end of the third quarter of 2020 were approximately 4.3% of total loans, which is down approximately 19% of total loans at the end of the second quarter of 2020. Outside of our strong financial results, we've had a lot of other success around our company. We announced several key commercial treasury hires in new and existing markets. In addition to that, we announced our new diversity inclusion officer. We're excited to be able to identify talent within the organization that promoted from within for this key leadership position. As for COVID, all I can say is we are definitely fortunate to have such a strong presence in the Southeast. We opened about half our retail lobbies and the branches this third quarter with minimal disruption. Our operations support staff is also beginning to return to work safely on a rotational basis and our customers, like many others, have learned to embrace the digital channels and mobile banking and we continue to have several initiatives there underway just to make that a better experience all the way around for our customers on a remote digital perspective. Branch optimization, we touched on this last time. That is really what's allowed us to reallocate resources to pay for a lot of the innovation and the new hires that I mentioned earlier. We closed eight branches on October 1st. We have one additional branch closure in process. That'll bring our total branch count down to 161 from the pre-fidelity acquisition pro forma of 199 branches. So these initiatives, like many others, have been well executed. It's been very thoughtful, but yet expeditious, and we continue with our cost-save initiatives there. I'll stop now and turn it over to Nicole to discuss our financial results.

Great. Thank you, Palmer. For the third quarter, we're reporting net income of $116.1 million, or $1.67 per diluted share. On an adjusted basis, we earned $116.9 million, or $1.69 per per diluted share when you exclude merger and restructuring charges, servicing asset impairment, COVID-19 expenses, certain legal fees, and the gain on sale of bank premises. These financial results represent a 70% increase over third quarter 2019 adjusted earnings. Our adjusted ROA in the third quarter was 235, which was an increase from the 89 basis points reported last quarter, and the $1.57 reported in the third quarter of last year. Our adjusted return on tangible common equity was 30.53 in the third quarter of this year compared to 11.66 last quarter and 18.95 in the third quarter of last year. For the year to date period, our adjusted ROA is 139 compared to 155 last year to date. And also our 2020 adjusted ROTCE for the year to date is 1784 compared to 1887 last year. Both of these decreases are driven by the higher provision for credit losses recorded this year, as well as the PPP loans also negatively affected the ROA. We recorded 17.7 million of provision for credit losses in the third quarter compared to 88.2 million last quarter. This decrease in provision is primarily related to the improvement of our economic forecast offset by increased qualitative factors in our residential real estate, commercial real estate, and hotel portfolios. For the year-to-date period, we've recorded $146.9 million in provision expense in the first nine months compared to $14.1 million in the same time period last year. During the third quarter, we grew tangible book value by 7.5% from $20.90 at the end of the second quarter to $22.46 at the end of this quarter. Our tangible common equity ratio increased 57 basis points to $8.27 from $7.70 at the end of last quarter. and a reminder that the asset growth from PPP loans negatively impacted that ratio by around 49 basis points. So excluding the PPP loans from that ratio, our TCE would have been 876 at September 30. We continue to be well capitalized and we feel comfortable with our capital levels and our liquidity position remains strong. Moving on to margin, while we did experience margin compression this quarter, it was not unexpected. If you remember back to the first quarter call of this year, we projected low to mid single digit compression per quarter going forward. The margin expanded in the second quarter due to reduced deposit costs and the accretion income that we said was not expected to occur in future quarters. And this quarter we saw that margin compression that we had previously expected. The non-recording accretion in the second quarter attributed for over half or nine of the 19 basis point compression seen this quarter. And the remaining 10 basis points was related to five basis points from PPP loans, three basis points in margin, and two basis points from excess cash. Comparing the first quarter margin of 370 to the third quarter margin of 364, the margin declined six basis points over those two quarters, which was exactly in line with our projections of low to mid single digit per quarter compression. and our net interest spread actually increased from 333 in the first quarter of this year to 340 in the third quarter. During that same time period, the first quarter to the third quarter, our yield on earning assets declined by 55 basis points, but our funding costs decreased by 62 basis points. Our core loan production yields declined to 4% for the quarter against 416 last quarter. and on the deposit side, we continue to see success in growing non-interest bearing deposits such that our total deposits grew 474 million and over 66% of that growth was in non-interest bearing. Non-interest bearing, as Palmer said, now represents 36.8% of our total deposits compared to 29.9 this time last year. And while a portion of these deposits, less than 30% are related to PPP loan proceeds, Those PPP proceeds loan deposits have been stickier than we first expected. As I previously mentioned, our third quarter provision expense was $18 million. Approximately $27 million was recorded for loan losses. $1 million was recorded for other credit losses. And then we reversed about $10 million of previously recorded related to unfunded commitments. So our total net expense was the $18 million. We had approximately $3.6 million of net charge-offs during the quarter. and our ending allowance for loan loss was $239.1 million compared to 208 at the end of the second quarter and $38 million last year. Including the unfunded commitment reserve, our total allowance was $260.4 at the end of the quarter compared with $246 million at June 30 and $39.3 million at the end of the year. Growth in our non-interest income was record-breaking during the third quarter. Our mortgage group had record production efficiency and earnings due to the interest rate environment. Mortgage production hit new record levels at just over $2.9 billion for the quarter and our gain on sale increased to $392 up from $353 last quarter. We anticipate that gain on sale to decrease back to normal levels in the 3% range. Net income in the retail mortgage increased to $61 million for the quarter. And while pipelines remain strong going into the fourth quarter, we do not expect this level of mortgage revenue to continue. Total non-interest expense declined from 155.8 to 153.7 for the quarter. However, when you remove the COVID expenses, merger restructuring, certain legal fees, and the law firm sale of branches that we adjust for adjusted earnings, Our non-interest expense totaled $153 million, which is up $3 million from last quarter. However, expenses in the retail mortgage segment increased $5.1 million due to the variable costs associated with the increased volume and are more than offset by the $29.9 million of increased revenues. All of our other segments, including the core bank, the administrative functions, premium finance, and SBA, had a reduction of non-interest expense and improved efficiencies during the quarter. This led us to be extremely pleased with our efficiency ratio this quarter. Our adjusted efficiency ratio improved to 47.34 compared to 51.08 last quarter. The additional mortgage revenue and the efficiency gained in the mortgage division significantly impacted this ratio and we do believe the ratio is going to increase back in the 53 to 55% range in future quarters as we don't anticipate the level of mortgage revenue and efficiency to be sustainable. On the balance sheet side, we had cautious but solid organic growth both on loan and deposits. Loan growth was $440 million or 12% annualized and about half of that growth was related to the warehouse lines and mortgage. That brings loan growth for the year to $2.1 billion including PPP and $1.1 billion or 11% annualized excluding PPP. As Palmer mentioned, we have several headwinds coming into the fourth quarter. such as cyclical warehouse payoffs, ag-line seasonality, as well as indirect runoff. So we believe our full year 2020 loan growth will come back in line with our original estimates of mid-single digit for 2020. More details of our loan production can be found in the investor presentation. And as I mentioned, our total deposits increased by $474 million during the quarter, of which $313 million was in non-interest bearing. So that loan and deposit growth helps keep our loan deposit ratios stable at 93%, which was consistent with what it was last quarter. With that, I will turn it over to Eileen for any questions from the group.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today comes from Casey Whitman with Piper Sandler.

Hey, good morning.

Good morning, Casey.

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

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

Perfect. That's definitely very helpful. Thank you. Okay, and then maybe just thinking about the movement in problem assets this quarter, can you give us some more color on the uptick, in particular on the residential mortgage non-accruals? I think you noted the majority had expired deferral programs, so is that a basket of smaller borrowers, and are these borrowers just not able to make payments, and rather than keep extending deferrals, you move them to non-accrual, or sort of what's What's going on with them within that bucket?

All right, I appreciate giving the opportunity to provide a little color on that. Let me say really three things, and I really address all of the MPA changes here, not just really the residential ones. But let me say virtually all of the change was related to COVID. So it's important to know that we really didn't have any surprises that came out of that. We've been saying for a while that hotels were going to be the issue, so changes in watch lists, changes in TDRs, and things like that are really highly concentrated in hotel borrowers. But from the NVA side, at least on the commercial side, there were really only two significant changes. One was a larger hotel loan, and the other was a restaurant that decided to close and is in the process of liquidating their real estate. and I look at the collateral position we have in each of those and I feel pretty confident that we won't really see any loss in those. Specifically, and I know your question was on the residential side, so we saw an increase of about 100 loans on the residential side, 106 loans that we added to the non-performing list. The average size in that portfolio was $425,000, so it's well diversified. It's not any loss that we might look at in that. It's not going to be that significant for us. But really what that represents is our borrowers that had come out of a CARES Act deferral program but had not yet confirmed or told us their intentions to either resume payments on their loan or go back into another one of the several options that the CARES Act has. So we were in this middle point of not knowing whether they were going to resume payments or take up another CARES Act program. And so we took the position that we would call those non-accrual until such time as we were that We were settled in the direction in which they were going. Some may stay non-accrual. I do believe that a portion of those will enter a CARES Act. As you know, there's a longer term period that they have programs available, so there are programs that they can enter into. Again, several different options. A portion of those may settle in the fourth quarter and come out of the NPA bucket, but I felt it was appropriate, but a conservative approach nonetheless to consider those non-performers. Casey, this is Palmer. The other thing to note on these, as John said, I think it's a very conservative approach because the majority of these individuals are entitled to extend their payments another six months through all these different programs. If they haven't declared that, we could have easily said, well, they've got another six months and kick the can out of the road. But what we were trying to do is take a more conservative approach to it. And if we'd not heard from them, we were going ahead and calling it the way we saw it. The other thing to note, too, is if we really wanted to be consequential with the earnings we had this quarter, if you wrap all those loans up, we could have charged every one of those loans off and still hit consensus and made some meaningful money this quarter.

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

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

Okay, and the 106 loans you referenced, how big is that bucket dollar-wise?

$40 million, $40.7 million.

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

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

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

So in just TDRs in general, over 80% of the newly created TDRs for the quarter were in hotels. I will say On the other side, though, the last slide deck we put out would have been, I think, sort of mid-September numbers. And we had about $240 million worth of hotels that were, I think, noted as still being in Phase 2 of the payment deferrals. And we only added 130 of that to the watch list. And so, you know, of that whole bucket, there was a significant portion of that group of hotel loans that did resume payments like we expected they would. But that last group, and it's for a variety of reasons and a variety of locations, just needed that longer runway. And I told our folks that I didn't want to do this for another 90 days. I really wanted to I didn't think the hotel sector was going to heal in 90 days, so I told them that if we weren't going to do something through the middle of next year, it really wasn't worth it. So taking that stance, we certainly would have created the TDR, but we tried to work with our customers to a length of time that would give them the best opportunity to get back to some level of normalcy.

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

Thank you.

Our next question comes from David Feaster with Raymond James.

Hey, good morning everybody. Good morning. Again, congratulations on a stellar quarter. I just wanted to follow up real quick on that hotel portfolio. Do you have the reserve allocation to the hotel portfolio and then Do you have any updated debt service coverage ratio or LTV metrics based on current forecast evaluation?

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

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

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

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

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

Again, congrats on a great quarter. Thank you.

Our next question comes from Brady Gailey with KBW.

Hey, thanks. Good morning, guys.

Good morning.

So y'all have done a pretty good job at holding the NIM relatively stable year to date, a lot better than peers. I know you've talked about this kind of low to mid single digit decline per quarter, which is what we've seen. Nicole, do you think the margin is close to a bottom here at 364, or do you think we should continue to think about NIM shrinkage going forward for the next year or so?

Brady, that's a great question, and I think that as much as I want it to be at the bottom, I don't think it's there yet. So as we model out, and we have been very aggressive on the deposit side, and I'll tell you one of the things this year, is that everybody has been aggressive on the deposit side, which we don't really see any crazy competition out there, which has made it available so that we can be competitive and reduce on the deposit side. So we continue to look for opportunities on the deposit side, but I do still see low single-digit compression for at least the next two quarters. So five to six basis points over two quarters When you look at our CD portfolio, we still have about $560 million that's currently at a $136 that will reprice between now and the end of the year. Our production rates in the third quarter was 46 basis points. So if we can get that $560 million that's at $136 to reprice down significantly, that will be one of our biggest wins for the fourth quarter. And then we have about another $1.3 billion over 2021 that will reprice and that's at a lower rate. That's actually at a weighted average of 98 basis points. So not as much room but there is some room there for it to come down as well. We continue to look on the other deposit side and deposit products and then really the other thing is on the loan side is that we internally have said that we're kind of street fighters looking for every basis point that we don't have to go you know we can compete we've said we'll compete on one basis point and not just necessarily do 25 basis point increments so anything that we can do to protect the margin our bankers have been very very cognizant of that very successful in doing that they've done a great job but I do see a little bit more compression before we bottom out.

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

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

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

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

Thanks, Brady.

Our next question comes from Kevin Fitzsimmons with DA Davidson.

Hey, good morning, everybody.

Good morning, Kevin.

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

That's right. You got it exactly right.

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

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

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

No, you're exactly right. We keep an eye on each line of business and more specifically each individual vertical. And I think we kind of break it down and John and his team do an excellent job in terms of getting granular. You're looking at retail centers versus office versus industrial. The industrial market throughout the southeast is extremely strong and robust. It's amazing how well that's performed. Obviously, the hospitality has impacted. Office, dependent on the office, where it is, but we don't see as much impact there on a broader basis and a lot of that you know and dealing with a lot of the large commercial real estate firms that we get a lot of our data from they while there's certainly people that are moving around in terms of square footage what they need they're not seeing a lot in the way of defaults and nor have we on our portfolio. Retail I think you have to look at each specific credit there you know if you've got a A credit tenant or an anchor tenant, a lot of ours are, for instance, like a public shopping center. That's a very different type of scenario than one that's in a more suburban retail center. And so we keep a close eye on those. But overall, when you look at the southeast, like I said, it's a very different market than a lot of the other banks are experiencing. And most of our credits, as you well know, are in that southeastern footprint. So right now, we're cautiously optimistic but certainly, you know, we've got a very conservative credit culture here and if we see anything that looks out of the ordinary, we're going to go ahead and address it. But right now, that being said, I think John gets a report regularly in terms of the, on the retail side, for instance, which is where we've got a lot of focus in terms of the payment from the tenants to the landlords and right now, our collection rate is still running around, what? 90%. are better, which is pretty impressive. And so we feel cautiously optimistic, probably the best way to put it.

Okay. Thanks very much.

Our next question comes from Christopher Maranac with Danny.

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

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

Okay great thank you for that and then just back to the mortgage business in general I mean how sensitive do you think the mortgage business is to The 10-Year Rising

I look at our locked pipeline and when I look at the locked pipeline even into the fourth quarter it's very encouraging to see and I don't see a lot of fallout and the pull through rates continue but I do think if we have a shock to the 10 year and had a rapid escalation there I think you have a lot of people that will get off the fence immediately so quite frankly you'd probably see a spike and then you'd probably see somewhat of a pull back.

Got it Palmer. Thank you for that additional caller. I appreciate it. You bet.

Our next question comes from Brody Preston with Stevens, Inc. Good morning, everyone.

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

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

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

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

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

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

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

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

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

Now, that's a good question. Actually, I think that's a little bit one and the same answer because the decrease, a portion of the decrease in consumer loans was a reclass of about $40 million or $50 million into hell for sale. $50 million of reclass from hell for investment to hell for sale. But the indirect portfolio amortization was about $120 million for the quarter. So that really hit the majority of the consumer portfolio. I think the decline is primarily in that area. As to the balance remaining and the amount that it would run off, that amortization has been fairly consistent over the last few quarters, so you can kind of sort of just see that, I think, over the next couple of years is probably the duration that we'll have remaining on it. We actually need to slow down a little bit, because it does take a little bit of clockwork, and... The portfolio there in credit has just held up extremely well during this downturn, very similar to the last one.

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

Yeah, the premiums are still pricing very favorably right now. You're looking at the 110 and above, and so that's still a very attractive option for us, obviously, to sell the guaranteed portion. But we are rebuilding the pipeline. It can't build fast enough, as far as I'm concerned, because I think that paper is very meaningful and during this cycle it's even that much more important to continue to build it so our pipeline is getting close back to where it used to be but obviously the focus has moved back from PPT to normal organic origination we hope to see that continue to grow and that's also an area where we hope to find some new originators to help supplement that SBA growth

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

There's going to be a lag effect, but I will tell you that as quickly as we have moved to adapt and absorb the increase in production, we would move equally as quickly to eliminate the expense. And that's a very scalable business, but you do have to be, you don't be premature, but you do have to be consequential. and right now we have not added, to answer your earlier question, we have not added any new additional teams. This is really production with our existing teams and they're all just on a great run rate right now and the pipeline going forward is reflective of that as well and we continue to see a meaningful amount of purchase versus refi business and that's always encouraging to me. I love seeing the purchase business continue to increase so we're kind of even in this low rate environment we're still running about 50-50 and I'd like to see that get up even higher on the purchase side and I think it will as Merida mentioned earlier if we start seeing rates come up a little bit but I view that more as a positive but that being said because the business is scalable you've got to immediately react to that and cut accordingly to maintain the kind of efficiency ratios that we expect to have a mortgage company and the leadership there has proven that they're able and willing to do that.

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

Our next question comes from Jennifer Denball with SunTrust.

Hey, this is Brandon King off of Jenny. Hey, I just have one question. Is there any consideration of any potential bulk sales of Problem Loans, for instance, in the hotel book. Has that been considered? I just want to know.

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

Okay, thanks, that's all I had.

Great, thank you.

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

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

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