Ameris Bancorp

Good morning and welcome to the Ameris Bank Q4 conference 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 questions. To ask a question, you may press star then one on your touch-tone 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.

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 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 will discuss the details of our financial results before we open 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 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 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

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. I mean, 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's 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 a 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 had 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 cents 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 a year-to-date return on average tangible equity of 1977. 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 runoff in the fourth quarter that would bring our loan growth closer to our original estimates as we said throughout the year in terms of mid-single digits. for a full year of 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, intangible book value, During the fourth quarter, we grew tangible book value by over 5% and over 13% for the year-to-date period, which is very meaningful. As reported last quarter, we do have a share repurchase program in place that's good through October 31st of this year. We don't anticipate buying any purchases in the near future, nor do 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 with where our dividends are today and do not anticipate any reduction at this time. Moving on to credit, John Edwards, our Chief Credit Officer, is with us today and is available to take any credit 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 been completed, barring any further economic downturn or 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 was 31 basis points of total loans compared to 10 basis points in 2019. Exclusive of the hotel note 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 in the third quarter have now been placed on the new CARES Act deferral programs and the net decrease in REO 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. Quick update on COVID and PPP. I 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 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 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. 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 request 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 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 and 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 in our board retreats, 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 talent and our goals and as I mentioned earlier, we're fortunate being some of the highest growth markets throughout the Southeast. We've got incredible talent and we've got good core strength of our more rural markets too and this balance is really what 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 needed technology 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 the shareholder value. I'll stop there and turn it over to Nicole to discuss our financial results.

Great, thank you, Palmer. As you mentioned, for the fourth quarter, we're reporting net income of $94.3 million, or $1.36 for diluted share. On an adjusted basis, we earned $102 million, or $1.47 for diluted share, and that's excluding things like the servicing asset impairment, COVID-19 expenses, certain legal fees, and the gain on sales bank premises. These financial results represent a 53% increase over the fourth quarter of 2019 earnings. Our adjusted ROA in the fourth quarter was 204. That was a decrease from the 235 last quarter, but it was an increase from the $1.47 reported fourth quarter last year. Our adjusted return on tangible common equity was 2504 this quarter, compared to 3053 last quarter, and again, an increase from the 1845 reported in the fourth quarter of 2019. For the full year 2020, we're reporting 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's compared to $222.9 million in 380 last year. So that brings our full year ROA to 156 compared to 152 last year and our full year ROTCE to 1977 compared to 1874 last year. As you stated, we've previously emphasized our focus on capital and tangible book value growth. So 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 an over 13% increase in tangible book value, up $2.88 from the 2081 last year to $23.69 this year. In addition, our tangible common equity ratio increased 20 basis points to 847 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 885 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 364 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 shows through our spread actually improved by three 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 felt compression from the excess liquidity on the balance sheet of approximately nine 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 four basis points. while our interest-bearing deposit costs 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 386, 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 could return closer to the 30% in the long term horizon. However, we do remain diligent in protecting these deposits through superior customer service, product enhancements, and the technology improvements that we've got. So for the year to date, our margin declined 18 basis points from 388 to 370, even with the large 150 basis points 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 feel that we were quick 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 forecast, 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 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 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 the 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 upper three range going forward. Net income in the retail mortgage division was $43.4 million compared to $61 million last quarter, but $11.6 million 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 153.7 million last quarter to 151 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. That 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 law share agreements with the FDIC and then $532,000 of OREO write down. So despite the expense to terminate these law 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 callback accruals and recovery sharing going forward. We continually, as usual, we prudently exam non-insurance expenses and we anticipate minimal increases in the core bank. And now moving on to the mortgage segment, we do anticipate decreases in the variable cost as production decreases back to normal levels. Although I want to remind everybody that there's always that cyclical first quarter bump such as payroll taxes. To talk about 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 gained 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 last quarter and 18.2 billion last year. So as Palmer mentioned on the balance sheet, I want to get a little details on that. We did experience a cyclical runoff, and if you remember to the third quarter, we said that we were anticipating that. So our total loans 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% of the quarter. I'm gonna 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 and didn't really have, it was not a surprise to us. So those decreases included the $238 million of PPP reduction $102 million of the continued indirect runoff, $87 million from the hotel note sale, an additional $87 million of some strategic runoff in the home builder 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 hell for sale category. So again, excluding that, you take that $735 million of runoff, that leaves us with $280 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 portfolios can be found in the investor presentation. So to wrap up, we are managing through this low rate environment and protecting our market 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 of 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. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today will come from Casey Whitman with Piper Sandler. Please go ahead.

Hey, good morning. 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 could put up in 2021?

Yeah, I'll take this. 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 in the first quarter, which is traditionally a seasonal quarter where you have a little bit of pullback. But there certainly remains headwinds in the economy and 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 where we've got 10 new C&I lenders, or whether it be on the mortgage front. I'm looking at the pipelines now and we've got incredible volumes still coming through those pipelines. I think that it's going to be a strong first half of the year for us. Like I mentioned in my comments too, I think the benefit we have is obviously being well positioned in the markets we're in. 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 and 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, rebuy 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 you know as we come out of the pandemic it's been you know some time since Lion so you know how should we think about your appetite at this point for our additional M&A?

Well I'll tell you as we've been very consistent 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 are going to be some opportunities and we will remain opportunistic and I think some of the opportunities that may present themselves have more to do with with where we're headed in terms of the economy and where we're headed in terms of needs 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 the position of offense and be able to be nimble and take advantage if necessary and if we deem appropriate for a potential target.

Makes sense. Thanks for the call. And let someone else jump on.

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

Hey, thank you. Good morning, guys. 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 was $414 million of mortgage banking fees. You know, it's unlikely that's repeatable this year. You'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'll tell you, our operation is very different than most, and I think that's reflective, obviously, in the success we've had this year relative to our peers. I think you'll find the same thing to be true as we go forward, because when you look at, and 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 that the purchase activity will actually increase with the refi activity, which is the drop-off. So when you hear people saying it's gonna 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 activities, mainly in purchase activity and relationships that we've got with builders and realtors that 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 activities to the detriment of the relationships of others will probably end up, some of those will end up 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 the third and fourth quarters. So I think the first half of the year for mortgage, for our mortgage shock, the shock is going to be less impactful than many others. But that being said, we will certainly, just like others, see the pullback 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. What really makes our story different, too, is when you look at the growth markets we operate in with the preponderance of our mortgage activity. 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 Oden 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 efficiency 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 don't know how long it answered, but I hope that gave you a little color.

Yeah, no, that's great, Palmer. I wanted to ask next about the sale of the hotel loans. You know, it looks like you just kind of took the allocated reserve and charge it off so that there's not much of a financial impact versus the reserves you had already built against those loans. So I get it. But still, it's an 18% loss 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?

Yeah, 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 know good and well how that sector performed. And the way we look at it, we were able to do very selectively go through and cull 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. 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 to 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 gosh forbid you have to foreclose on it, just going through the foreclosure process, Then you've also got on top of that, you've got deferred maintenance you've got to do. The property taxes are passed through. You've got to bring it current. You've lost the flag because it's been dark. The operator is 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 had told you back in 07-08 that I could get 80 to 85 cents on the dollar for a hotel, you would tell me to jump all over it. And today we feel like we have culled 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 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 distress price. And as we look out into the future, I feel like these hotels and the economy in general, I think it's going to be much more of a gradual reopening just as it was before where it was kind of a slow decline initially. And we do not see that sector picking up dramatically in the near future. And as a result of that, we clearly identified this as an opportunity to capitalize on, so we did it.

Okay, that makes sense. Then finally, for me, just looking at the expense base, what sort of growth can we expect in expenses outside of mortgage banking? I know that'll 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?

We've got, well, on the C&I front, we're probably going to look to hire about seven or eight more C&I specific lenders. But one of the things that Lawton Bassett 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 that overhead and expense into new lenders. And we'll continue to be efficient with that process. I do see us looking to hire another seven to eight more CNI lenders in the near future. Nicole, you can comment on any of the additional overhead expenses.

Sure, Brady. We are very, very cognizant of non-interest expense and we closed additional branches in the fourth quarter and we did have those three events in the fourth quarter again that we We made a decision to make that donation and we made a decision to exit Lawshare. 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. We are very cognizant of finding for those places that we do need to spend money and we do 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, as mortgage banking origination pulls back, those variable costs will pull back as well.

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

Thank you.

Our next question will come from David Feaster with Raymond James. Please go ahead.

Hey, 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, you know, kind of production to accelerate and growth hopefully to accelerate throughout the year and then just kind of the pulse of the hiring market more broadly? Are you guys seeing new opportunities still?

Yeah, absolutely. And to answer your question more specifically, when you look at our price line for the kind of core bank, which typically we'd like to keep that over a billion dollars, 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, 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 the 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've got another 20% coming out of Florida and another 20% coming out of Carolinas for the most part. But I think we'll continue to see that grow because a lot of the hiring opportunities that we have seen as of recent have come out of the, quite frankly, 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 building CNI because if you start seeing erratic growth there you probably 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 were encouraged by the production and the productivity we've seen so far. When this economy opens up a little bit, I think that it will accelerate that opportunity.

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. Where are you interested? Is that still attractive to you in 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 what kind of deals you'd be interested in?

Yeah, it's kind of a dual approach. I mean, 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. I would tell you what we need to focus there and do focus is capturing additional market share. Then if you look at expansion beyond that of our core branch footprint, you'd look at where our loan production offices are. We've 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 to look in 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 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, I think we've said all along and been very consistent, probably anything, nothing smaller than about $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 fees going forward? I mean, 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?

Yeah, premium finance has been a home run 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'll 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 the 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 a pullback 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.

Our next question will come from Jennifer Demba with Tourist 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. Banks traditionally are very slow to move and adapt and change. I think it's more of a herd mentality. I think the herd is moving. I think that'll 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 teletransactions. Teletransactions are still about where they were before and what that tells you is that the drive-throughs 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 appealing to them as the other walking in a branch. But I think that what we've found, and we've been pretty proactive in our branching, in terms of branch closures and opening the drive-thrus. But I think what you'll find is many branches will continue to keep the drive-thrus open, but the lobby will remain closed. And then you look at the talent within those branches, and a lot of that talent can 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 other places without having to to hire talent elsewhere. So I think at the same time you can look through processes and efficiencies and allow you, if you're growing, to absorb a lot more of those costs or efficiencies rather than just adding additional overhead. But branching in of itself, 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 touched on earlier the need for wealth management and mortgage and turning them more into a the 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.

Our next question will come from Kevin Pitt-Simmons with DA Davidson. Please go ahead. Hey, good morning, everyone.

Morning. 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. 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 PPP 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, sure. So I want to take the last question first because that actually is going to lead right into the answer to the first one if that's okay. So we have about $41 million remaining of the original, the PPP kind of round one. It's about $21 million and I think that is, you know, we said that we expected, you know, while we were amortizing demand over the contractual maturity, which was 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 that have already started to affect it. 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 we use that liquidity, or how do we put that to use? So we have about half a billion dollars, $500 million of cyclical runoff of deposits. We've already had about $300 million of that runoff 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. So then we are estimating, we're kind of guiding $300 to $700 million 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 of 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 with either some rate reductions or runoff on the deposit side. Looking forward, or I think I've given guidance before in our CD pricing, we still have some opportunity there. We have about $500 million of CDs that repriced in the first quarter. They're currently at a 112. Last quarter's production was about 30 basis points. So if we can keep our production in that 30 basis points, we've got an improvement there. Second quarter, we've got another half a million. That's at 70 basis points. and then we have 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, we're to the point now of just some specific money market and now accounts that are outside of the norm. I think our board rates are about as low as they can be. So depending upon that liquidity and how we are able to deploy that and the execution on that deposit cost, First quarter margin compression we're thinking to be in the five to seven basis point range. I hope to beat that again, but that's kind of where we anticipate it coming out. I hope that was a long answer in detail, but I hope that's what answers your question.

No, that's great. And just to clarify, so that includes PPP fees, that five to seven down, or does not?

It does.

It does include that, got it.

It does include that. And so depending upon how much of that comes in the first quarter versus the second quarter, that could vary, you know, that could get us down to, if more of it comes in, you know, maybe we hit in at the three to four, but if less of it comes, then maybe we're in the seven.

Got it. Okay. Very helpful. Thank you very much. Just one quick follow-up question. The consumer portfolio, the $119 million that was transferred to help for sale, what is that portfolio and why was it sold? 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 it's held for sale. We anticipate that potentially selling in the first quarter. That was an intentional decision for us to sell that.

Great. Okay. Thank you very much.

Great. Thank you, Kevin.

Our next question will come from Brady Preston with Stevens Inc. Please go ahead.

Hey, good morning, everyone. Good morning. Hey, I just wanted to ask Nicole if just more specifically on expenses, you know, you all have done a good job sort of growing the core bank, you know, with Core CNI and CRE this quarter. The growth was pretty strong. but sort of excluding the foundation contribution and the FDIC termination expense running pretty flat on 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 October 1st. We have one additional branch that has closed so far in January. So that's kind of the branch optimization update. So 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 some innovation side. We've started using some robotics and some AI. We started that in mortgage and we probably couldn't 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 has helped drive the efficiency in the mortgage division. not only did they have the increased production but they also had an improvement in their 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 you know just open it up to employees and say help us you know and we're going to help you benefit so kind of doing some cost initiatives there where you know asking people if you're doing things that don't make sense raise your hand and Let's find out why or if there's a better way to do things, don't be as scared to raise that question. We've had a history of cost raising. I remember when our efficiency ratio was in the 70s and that when we said we were going to get in the 60s and then when we said we were going to get in the 50s. It's almost become part of our culture. The word that we use a lot is discipline. 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. And so that is just kind of a culture as well and just looking at and deciding where are we going to spend our next dollar and where do we get the best return on that investment dollar.

And Brody, to 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 should have is they 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 will provide a meaningful return? The health for sale portfolio, as you 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 investment 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 each area of the company. And that's how we kind of came up with the decision on hotels. That's how we came up with the decision on the health for sale. That's how we come up with the robotics for the mortgage. And you'll see that kind of mentality throughout the company as we go through 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, but would it be safe to assume kind of a mid-single-digit growth rate from here, just given the loan growth trajectory?

Yes, very low single digits.

Okay. 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 3Q19, 4Q19 levels at some point here in the back half of 21 and into 22, would it be safe to assume that the expenses with that will head back towards 3Q19 and 4Q19 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 ratio so that's definitely where we expect a variable cost but then also you'll see the list of 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 some of that transitory or if it wasn't what 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

So that's a great point. So we do have excess liquidity and just historical America, we have some excess deposits that typically come in through our municipalities and also through some of our ag. So we have about $500 million of that excess liquidity that we anticipate will run out, just deposits that come in in the fourth quarter and basically go back out in the first quarter. We've already had about $300 million of that runoff in January. We anticipate another $200 million. 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 runoff. We've got about $500 million earmarked for the new PPP round, about $300 million for the bank and premium finance growth, and then if that really raises about $200 million, if we can have additional loan growth would obviously be the preferred methodology, but we need to keep it safe. I'm looking at John 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 runoff of some certain deposit accounts. Again, we've run off just about all of our non-core funding. Our funding, we're at almost 97% of our funding is core bank deposits. We've run off just about everything else we can, but 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 take a maximum risk at this point with the rate environment right now.

And it's an opportunity cost, too, obviously. We'd rather 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 around 58%. Traditionally, we have run in the 90s, high 90s. and so I think that's what you'll see it migrate towards and as I mentioned we saw this during the last mortgage wave is that as those retires pull back and then that's when poor mortgage companies like ours actually garnered market share because when people pull out of the business or close up shop and wait 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 retail business left but Right now, we've got capacity in terms of the efficiency that we put in place in the robotics to layer in additional production. And right now, I'll tell you too, as fluid as the market is and as full as the pipelines are with a lot of these originators, there's still some movement out there. And I think we've got opportunities in some select markets that we'll be focused in on to bring in additional talent and production. Okay. 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 specific

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 there were some TDRs in that mix and non-accrual loans in that mix.

By the end of the third quarter, we had both a FAS 5 and some 114 reserves associated with that portfolio. Okay.

Nicole the production yields 386 at the core bank you know you've seen a study sort of it's not surprising but a steady decline here the last couple quarters in that production yield where do you see those going in in the first quarter you know I would anticipate and certainly hope that they stay stable at this point you know again the best offense to that or defense to that is those deposit costs to continue to watch those as well so But the trend so far is fairly flat.

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

from our, believe it or not, they come from our commercial base. Even though, albeit small in the core, that's where the majority of the deposits come from.

Okay.

Which is a counter to the growth of what we're investing in here, and especially as it pertains to the treasury management side. And I think it's, for all benefits, if they enhance that treasury management feature, that helps accelerate the potential for additional deposits and funds.

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

Yeah, I would tell you that the same answer I gave before, that, you know, if we looked at a target, it wouldn't be any smaller than $3 billion. And anything we do – You know, 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 needs to be meaningful. And if you, you know, go down the line of an MOE type of discussion, you know, one plus one would always need equal three to even consider something like that. And you have to have the, 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 on top. and so we had to find somebody of an equal mindset that set on making sure that we retain those same level of performance. But right now, the nice thing that we've been able to show the market and show ourselves too is that aside from M&A, we don't do M&A, we've got tremendous earning power here at 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.

My last question today will come from Christopher Maranek with Jenny Montgomery Scott. Please go ahead.

Hey, Palmer and Nicole. Just to follow up on the mortgage margin, I know the comments earlier.

I'm just curious if the history of the Marist 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, there's some, but not as low as it had been historically?

Yeah, 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 have put in place and granted, margins are not going to hold as well as they have as we noticed 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, obviously you'll start seeing margins pull back but it is a new focus 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 efficiency that he's garnering throughout his operation.

Great. Thanks for that. Are there still opportunities to hire more producers on the Mortwood side?

Yes. As I touched on earlier, we've got opportunity there and we'll be making that happen in short order. We've got some upcoming opportunities. will be continued growth in that, or 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 to 2021. Meris 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