Ameris Bancorp

Good morning or good afternoon all and welcome to the Ameris Bank Third Quarter Earnings Conference Call. My name is Adam and I'll be your operator today. If you'd like to ask a question during the Q&A portion of today's call, you may do so by pressing star 1 on your telephone keypad. I will now hand you over to Nicole Stokes, Chief Financial Officer, to begin. So, Nicole, please go ahead when you are ready.

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

Thank you Nicole and good morning everyone. I want to thank you all for taking time to join us this morning for our third quarter 2021 earnings call. We were very pleased with the third quarter and the momentum that we have with the loan production, the growth and the financial results. Nicole's going to update you on some of the detailed results in a few minutes but I did want to hit a few highlights for the quarter as well as a few other successes which positively impact our outlook as we go forward. For the quarter, we earned $83.9 million or $1.20 per diluted share on an adjusted basis, and this represented a 151 return on average assets and a 17.65 return on tangible equity. For the year-to-date period, we earned $287.2 million or $4.12 per diluted share on an adjusted basis, which is a significant increase from the 2.86 reported in the same period last year. The 2021 results represent a year-to-date ROA of 179 and the year-to-date return on average tangible equity of 21.38. Our adjusted efficiency ratio this quarter was 56.56%, an increase from the 54.07% last quarter due to certain non-recurring expenses during the quarter. And that said, our year-to-date efficiency ratio is 55.05%. and should return below 55% by the end of the year. We remain very encouraged by our organic growth both on the loan and deposit side and exclusive of PPP runoff loans grew over $250 million or 7% annualized during the quarter and that leaves our year-to-date annualized loan growth at 8.7% and excluding PPP runoff and 3.2% including PPP runoff. We still expect to see mid-to-upper single-digit loan growth for the year based on our pipelines and opportunities within our growth markets. On the deposit side, we continue to see a lot of success there in growing non-interest-bearing deposits, which now account for over 40% of our total deposits. Nicole is going to discuss our excess liquidity and the impact, obviously, it has on the margin in more detail in a few minutes. But I did want to mention the continued success we have there on the deposit front. On the capital side of the balance sheet, our capital position remains strong. We've consistently said that we're very focused on tangible book value growth, and this quarter was no different. I'm happy to report we grew tangible book value by over $1 per share, or 3.8% during the third quarter alone. And we've grown tangible book value by $3.77, or almost 16% for the year so far. And this equates to over a 20% annualized growth rate in tangible book value, which is very meaningful. Our TCE ratio increased to 8.8%, very close to our 9% goal. And if you exclude the $3 billion of excess liquidity on our balance sheet, the TCE ratio would have been well over 10%. So clearly we have ample capital to support our growth initiatives and consider opportunistic transactions. While we remain focused on capital preservation, we did announce, as many of you may have seen in our release, that our board approved extending our share repurchase program. through October 31st of next year. We did repurchase $6.5 million during the third quarter, and that leaves approximately $79 million left on that program. And while we don't anticipate executing on this during the remainder of 2021, we do like having the optionality that the right opportunity presents itself. As for our dividend, we still remain very comfortable with where our dividends are today. John Edwards our Chief Credit Officer is with us today and he's certainly available to take any credit questions after our prepared remarks but I wanted to hit a few highlights in terms of credit. For the quarter we had net recoveries of $127,000 so zero charge off ratio compared to 2.6 million of net charge offs last quarter of seven basis points. Our non-performing assets as a percentage of total assets was consistent with last quarter 32 basis points The loans that remain on deferral at the end of the quarter were approximately 0.6% of total loans, which is down from approximately 4.3% of total loans this same time last year. Our allowance coverage ratio excluding unfunded commitments was 1.18% net of our PPP loans at the end of the quarter. And I'll tell you, you know, despite the uncertainty that's still in the economy out there, we continue to see very strong asset quality and solid growth opportunities in our markets for the remainder of this year and the investments that we made last year and over the last 18 months in both technology and talent continue to propel our incremental growth and really helps us to further leverage our platform and that certainly has helped us eliminate any dependency on recent hires or future hires to deliver our growth targets and that's a meaningful distinction for our company. but I'll stop there and now turn over to Nicole to discuss our financial results in more detail.

Great. Thank you, Palmer. So for the third quarter, we're reporting net income of $81.7 million or $1.17 per diluted share. On an adjusted basis, we earned $83.9 million or $1.20 per diluted share when you exclude the servicing asset impairment, the loss on bank premises, and the merger charges. For the year-to-date period, we are reporting net income of $295 million or $4.23 per diluted share. On an adjusted basis, we earned $287.2 million or $4.12 per diluted share when you exclude those same items I just mentioned. We were pleased with our operating ratios. Our adjusted return on assets in the third quarter was 151 and our year-to-date adjusted ROA was 179. Our adjusted return on tangible common equity was 1765 for the quarter and 2138 for the year-to-date period. As Palmer mentioned, tangible book value increased by $1.1 or 3.8%. That was from $26.45 at the end of the second quarter to $27.46 at the end of this quarter. For the year-over-year, comparing September 30 last year to September 30 this year, our tangible book value had increased $5 per share or over 22% from $22.46 this time last year. In addition, our tangible common equity ratio increased five basis points to 8.88, and it's increased 61 basis points over the past year from 827 this time last year. We have approximately $3 billion of excess liquidity on our balance sheet, and that negatively impacted this ratio by 144 basis points. So if you took that cash out of our assets, our TCE ratio would have been about 10.32 at quarter end, which is well above our stated target of 9%. We continue to be well capitalized and we feel comfortable with our capital and dividend ratios. Moving on to kind of net interest income and the margin. As you can see on slide eight, our net interest income has remained fairly stable since last year. But the thing that we're really proud of is that if you look at our net interest income, exclusive of accretion and PPP, kind of getting to that core NII, it increased 3.4 million this quarter over last quarter. and 1.7 million this quarter over this time last year. And that shows a real positive trend as people have wondered what happens when PPP runs off. Our net interest margin declined by 12 basis points this quarter from 334 to 322. Our yield on earning assets declined 14 basis points, but our funding costs helped offset that by two basis points. When we look at the margin, we really have four factors. So eight basis points of our margin squeeze came from our excess liquidity that continued to add this quarter. Three basis points came from compression from the, or three basis points of the compression came from the $2 million decline in PPP income. And then there was another about three basis points of decline related to the accretion income decline. And so that's about the 14 basis points of asset compression offset by two basis points of improvement in our funding costs. so the point there is excluding the excess liquidity, our margin would have only declined about three to four basis points for the quarter and all of that is attributable to the PPP and accretion decline. Also on slide eight, you can see that the table to the left, the $3 billion of excess liquidity and what it's done to our margin ratio, it accounts for about 42 basis points total of the negative compression from one year ago. So we remain focused on our deposit costs and we continue to grind them down We still have some room for improvement in the CD portfolio, but the real driver to an improvement margin is putting that excess liquidity to work. We continue to anticipate net loan growth, net of PTP activity next year in the high single digits, kind of that seven to nine percent range, which is about one to 1.3 billion of loan growth. That leaves about 1.8 billion of excess cash to prepare for our deposit runoff and then also to begin buying investments and to fund opportunistic if other investments become available. Moving on to provision, we reversed about $9.7 million of provision expense for the quarter and that really was due to an improvement in the economy, specifically home prices and the CRE index and then our own improved credit quality this quarter with Palmer mentioned the recovery versus charge-off helped offset the need for additional provisions on our loan growth. are ending allowance for loan losses with $171.2 million compared to the $175.1 million at the end of last quarter. And including the unfunded commitment reserve and allowance for other credit losses, our total allowance for credit losses was $188.2 million at quarter end. Non-interest income declined $12.7 million this quarter due to decreases in mortgage banking activity. As shown on slide 11, the retail mortgage originations now represent 17% of our pre-provisioned pre-tax income for the third quarter and that's down from 49% this time last year. Production in the retail mortgage group declined about 14% to 2.1 billion for the quarter and similar to last quarter our non-interest expenses declined about 8% or 4.4 million in the retail mortgage division. The average gain on sale increased to 317 for the quarter compared to 2.77 last quarter. and the open pipeline, this is encouraging, the open pipeline at the end of the third quarter was 1.9 billion compared to 1.7 at the end of the second quarter. Total non-interest expenses increased by 1.4 million from the 135.8 million last quarter to the 137 this quarter, but excluding the loss on bank premises and the merger charges, non-interest expense actually declined $120,000. As I mentioned, mortgage expenses declined about $4.4 million during the quarter, but those savings were offset by increases in other areas, including enterprise-wide services and support staff. A lot of those increases, or the majority of those increases, were related to increased legal and professional fees and other one-time expenses that are not expected to be recurring. Because of these non-recurring expenses, our adjusted efficiency ratio for the quarter was 56.56. versus 5407 last quarter, but we do expect that it will return to under 55% by the end of the year. On the balance sheet side, we ended the quarter with assets of 22.5 billion compared to 21.9 billion at the end of last quarter. We really were pleased with our organic loan growth of 43.7 million, which is above 1% for the third quarter, but as you can see on slide 16, we had $471 million of headwind against $515 million growth in CRE, CNI, premium finance, and residential. PPP loans declined $208 million, and indirect loans declined $72 million. So excluding that PPP runoff, our loan growth was about 7% annualized. We have about $280 million of PPP loans left, and we have about $325 million of indirect loans left. So we really anticipate the headwinds from the runoff in both of these portfolios to subside early next year. While I'm on PPP, just a quick update there. We've received payments and forgiveness of just over a billion dollars on round one, leaving the outstanding balance there at just $21 million. And then the round two, we have a balance of about $259 million. The average balance of PPP loans in the second quarter, I'm sorry, in the third quarter was $377 million. compared to an average balance in the second quarter of $708 million. We have about $14.7 million left of deferred fee income on the PPP loans, which again we anticipate amortizing into income over the next three quarters. So we already discussed the excess liquidity that you can see in our other earning assets on the balance sheet due to the tremendous deposit growth we saw this quarter. Deposits grew $575 million. but the real key here is that non-interest bearing deposits grew $633 million and our interest bearing decreased about $58 million. As Palmer mentioned, our non-interest bearing are now over 40% of our total deposits. This is just really key as our bankers have continued to grow non-interest bearing deposits to fund that future growth and I said last quarter we do anticipate some deposit runoff as life starts to get back to normal post-pandemic and as rates potentially rise. So with that, I will wrap it up. I appreciate everyone's time today. I'm going to turn the call back over to Adam for any questions from the group.

Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure your headset is fully plugged in and unmuted locally. That's star followed by one on your telephone keypad. Our first question today comes from Brady Gailey from KBW. Brady, please go ahead.

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

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

and more importantly too, Brady, I think everybody saw the improvement in the margin there that bounced back to over three. We were down at 275, I think, last quarter. So between the production and the margin, we feel very positive about fourth quarter in terms of mortgage, but a lot of mortgage, as you well know, is about timing and we had the opportunity to have some meaningful sales at the end of second quarter that obviously impacted third quarter.

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

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

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

It is. We are still targeting below 55%.

Okay, great. Thanks, guys. Thank you.

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

Good morning, Casey.

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

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

Okay, understood. And just to tighten up to the loan growth guide, I heard a mid to upper and then a 7 to 9% range. Is the mid to upper kind of how you're thinking about for this year and then potentially getting are all closer to that seven to nine range for next year, just to be clear, thanks.

That's right, that's exactly right. This year it's kind of in that five to seven range and then next year it's kind of in that seven to nine. And a lot of that is because of the headwind of the indirect and the PPP coming out next year.

I'll let someone else jump on, thanks.

Great, thank you, Casey.

Our next question comes from Kevin Fitzsimmons from DA Davidson. Kevin, please go ahead. Hey, good morning, everyone.

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

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

Great.

That makes perfect sense.

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

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

Great.

Thank you. You bet.

As a reminder, if you'd like to ask a question, please press star followed by 1 on your telephone keypad. Our next question is from David Feaster from Raymond James. David, please go ahead.

Hey. Good morning, everybody. Good morning, David. I just wanted to to start on production you know overall production you guys have done a really good job until steady just north of about 900 million the past couple quarters I guess how do you think about the ability to to accelerate production going forward um you know is there an we've talked in the past about the increased appetite to maybe move upstream does that potentially help or is it new hires that you've talked about um just curious your thoughts on on that production side

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

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

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

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

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

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

Yes, so the tax piece was about $4 million and then the kind of the one-time other expenses were about another $3.5 to $4 million.

Okay, thank you.

Our next question comes from Christopher Maranac from Jody Montgomery Scott. Christopher, your line is open.

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

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

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

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

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

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

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

Okay, so think of those as two separate.

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

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

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

Hey, good morning, everyone. Good morning, Brody. Nicole, there is a line in the press release as it relates to mortgage that kind of caught my eye. You know, you noted that there was an $18.5 million reduction in mortgage pair-off fees compared to the second quarter, and I know that those fees are typically kind of charged to The sellers of mortgage loans if they don't fulfill their agreements. Are you all a buyer of mortgage loans for securitization purposes? What are those pair-off fees for you all?

Sure. No, we are not a buyer of those. and what that really has to do with is last quarter because it's a timing issue and because of last quarter the overproduction and we accelerated the selling of some loans in the second quarter that we received some pair outs and excess. We were able to over fulfill some and so we got the benefits of that last quarter which is really that drive of that coming down this quarter. So it's not necessarily that we were penalized this quarter, it's just that we had some excess or some additional last quarter.

okay got it was was any of that in the the gain on sale margin last quarter or is that excluded from that it's excluded from that okay understood understood thank you for that um maybe just on the on the margin front maybe trying this a different way so when i look at you know the the hfi loan income and i strip out the impacts of Purchase Accounting, and PPP. Year over year, you all are down about 2.5% to about $145 million this quarter versus about $149 million in the 3-2-20 quarter. And I know that the new production yields are relatively challenging, but you all have grown core loans 5% over that period. So I guess help me think about, you know, the trajectory, I guess, maybe of loan income going forward, especially as, you know, new production yields seem to be coming on a bit lower. And when I look at the back book, at least for standalone Ameris, I know some of that change post-Lion. But, you know, in 18 and 19, the banking division was putting on loans, you know, in the high fours to mid fives kind of range. So it just seems like a challenging ramp for loan income despite a strong growth outlook from here. So help me think about that.

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

Got it. Thank you for that. And then on the CECL slide, you all noted that there is a seven and a half million dollar decrease on specific reserves and you know there are net recoveries on the quarter and gross charge-offs were only three and a half million so I wanted to ask you know what was it that drove that you know there I think there was a reduction in the hotel exposure this quarter was it related to that just wanted to get a sense for what happened there that's exactly what happened there as we as we push further behind or ahead of the COVID impact

certain hotel loans were showing improvement through the quarter and they were removed off of the 114 list.

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

Well, really what that is more reflection of is some hotels were faster to heal than others and so we're kind of, you know, until we get pretty good clarity of the financial performance Post-COVID, you know, they're better and sustainable. We've left them on the watch list.

So what really that is is just sort of the remnants of hotel loans that have yet to really reach break-even or better operating results, but not necessarily saying that we'll look to push those out of the bank, but they're just continuing to take a little extra time to get over the hump. Got it. Okay, and then I just had one more. And Nicole, if I could just circle back to those pair off fees. I just had a question from someone. Should we expect those to be, you know, in the yearly run rate, you know, like some of those pair off fees tied to the excess production on a fairly lumpy basis quarter to quarter? Or is that something that, you know, is more idiosyncratic to that quarter and it shouldn't be modeled going forward?

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

All right. Thank you very much for taking my questions, everyone. I appreciate it.

Thanks, Freddie.

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

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

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