Q3 2020 Ameris Bancorp Earnings Call
Good morning, and welcome to the Ameris Bank Corp, third quarter 2020 financial results call.
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I would now like to turn the conference over to Nicole Stokes Chief Financial Officer. Please go ahead.
Great. Thank you <unk> and thank you to all her 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 Ameris Bank Dot com.
Joining today got polymer Proctor, our CEO and John Edwards, our Chief Credit Officer Palmer will begin with opening general comments and then I'll discuss the details of our financial results before we open it up for Q1 day.
Before we begin I'll remind you that our comments may include forward looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially we list. Some of the factors that may cause results to differ in our press release and in our FCC filings, which are available on our website, we do not.
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 Companys performance you can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation.
With that I'll turn it over to Palmer I couldn't comment.
Thank you Nicole and thank you everybody who has joined our call today, we've got some exciting news to talk about this morning.
Those last quarters call with our new marketing campaign to back the business together and I think the third quarter results speak for themselves and reflects that commitment. The colds can update you a little bit later, its more detailed financial results in a minute, but before we get there I didn't want to share some highlights from the quarter as well as a few other successes, we've recently had which part.
Suddenly impact our outlook as we go forward for the quarter, we earned $116.9 million.
Dollarssixty nine per diluted share on an adjusted basis, which is up over 70% compared to the third quarter last year. This.
This represents a 35 return on average assets in a 30.53% return on tangible equity our efficiency ratio improved to under 50%, which was the first time in our history down to 47.34% on an adjusted basis.
For the year to date period, we earned $198 million or $2.86 per diluted share on an adjusted basis, which is consistent with the $2.85 reported for the same period last year. The big difference between this year. We've also provided over 130 million more to the loan loss reserve.
<unk> than we did last year.
That's important to note that 2020 results represented a year to date or lay up 139, a year to date return on average tangible equity of 17.84%.
We're pleased with the organic growth and that's both on the loan and deposit side loans grew over 330 million or 12.2% annualized during the third quarter and that leaves our year to date annualized loan growth of 22.1% and that's including P.P.P. loans and 11% excluding the PPP lives.
We do have anticipated seasonal loan run off in the fourth quarter and that will bring our loan growth closer to our original estimates of mid single digits for the full year of 2020.
On the deposit side, we continue to see a lot of success, there and growing noninterest bearing deposits, which is where our focus remains.
Now we have accounts that are non interest bearing accounts equate to over 36% of total deposits.
As for capital, we've said for several quarters that were focused on capital preservation growth at TCT and growth in tangible book value. During the third quarter. We grew both T C and tangible book value by over 7%, which is very meaningful as you know this quarter, we successfully issued 110 billion of sub debt load.
Rate of 3.78% and this will positively impact our total risk based capital ratios by approximately 60 basis points.
While we remain focused on capital preservation, we announced in our release. This morning that our board did approve extending our share repurchase program through October 31st next year, while we don't anticipate executing on this during the remainder of 2020, we do like having the option to repurchase our shares at the right opportunity presents itself as.
As for our dividend, we remain comfortable with where our dividend is today and do not anticipate any change at this time.
Moving on to credit John Edwards, our Chief Credit Officer is with US today and he's available to take any questions. After our prepared remarks, but I did want to hit a few highlights in terms of credit we do believe that the heavy lifting of the reserve is complete now barring any further economic downturn in additional provision expense.
Solely be related to deterioration specific credits this brings our allowance coverage ratio, including the unfunded commitments to 1.48% net of PTP loans, our annualized net charge off ratio was 10 basis points of total loans and that compares to 27 basis points last quarter or in P.A.
Yes.
As a percent of total assets increased to 83 basis points compared to 59 basis points last quarter, mostly due to increased nonaccrual loans and residential real estate and commercial real estate loan categories.
And finally, the loans that remain on deferral at the end of third quarter of 2020 or approximately 4.3% of total loans, which is down approximately 19% of total loans at the end of the second quarter of 2020.
Outside of our strong financial results, we've had a lot of other success around our company. We are now several key commercial treasury hires in new and existing markets. In addition to that we announced our new diversity inclusion officer, we're excited to be able to identify talent within the organization that promoted from within for this key leadership position.
As for coal, but all I can say is we are definitely fortunate to have such a strong presence in the southeast we opened about half our retail lobby and the branches this third quarter with minimal disruption.
Operation support staff is also beginning to return to work safely on a rotational basis.
And our customers like many others have learned to embrace the digital channels and mobile banking and we continue to have several initiatives, they're underway just to make that a better experience all the way around for our customers on a remote digital perspective.
Branch optimization, we touched on this last time that is really what's allowed us to reallocate resources to pay for a lot of the innovation and the new hires that I mentioned earlier, we closed eight branches on October 1st we have one additional branch closure and process that will bring our total branch count down to 161 from the pre Fidel.
The acquisition pro forma for the 199 branches. So these initiatives like many others have been well executed its been very thoughtful, but yet expeditious and we continue with our cost saving initiatives. There I'll stop now turn it over to Nicole to discuss our financial results great. That's a calmer for the third quarter reporting.
Net income of 116.1 million or $1.57 per diluted share on an adjusted basis, we earned 116.9 million or $1.69 per diluted share. When you exclude merger restructuring charges servicing asset impairment COVID-19 expenses certain legal fees and the gain on sale bank premises decent.
Actual results represent a 70% increase over third quarter 2019 adjusted earnings or.
Our adjusted our way in the third quarter was 235, which was an increase on the 89 basis points reported last quarter and the dollar 57 reported in the third quarter of last year.
Our adjusted return on tangible common equity was 30.53 in the third quarter of this year compared to 11 66 last quarter, an 18 95 in the third quarter of last year.
For the year to date period, our adjusted our way is 139 compared to 155 last year to date.
And also our 2020 adjusted our T C for the year to date is 70 84 compared to 18 87 last year. Those are these decreases are driven by the higher provision for credit losses recorded this year as well as the PPP was also negatively affected our away.
We recorded 17.7 million of provision for credit losses in the third quarter compared to 88.2 million last quarter. This decrease in provision is primarily related to the improvement of our economic forecast offset by increased qualitative factors in our residential real estate commercial real estate and hotel portfolios for the.
For the year to date period, we recorded a 146.9 million a provision expense.
In the first nine months compared to 14.1 million in the same time period last year.
During the third quarter, we grew tangible book value by 7.5% from 2090 at the end of the second quarter to 20 to 46 at the end of this quarter.
Our tangible common equity ratio increased 57 basis 0.8, 27 from 770 at the end of last quarter and a reminder, that this asset but the asset growth from PPP was negatively impacted that ratio back 49 that around 49 basis points.
So excluding the PPP learn from that ratio RTC would have been 876 at September 30, we can see.
We continue to be well capitalized and we feel comfortable with our capital levels and our liquidity position remains strong.
Moving on to margin, while we did experience margin compression. This quarter. It was not unexpected if you remember back to the first quarter call of this year, we projected low to mid single digit compression per quarter going forward the mortgage.
The margin expanded in the second quarter due to reduced deposit cost and the accretion income that we said was not expected to occur in future quarters and this quarter. We saw that margin compression that we had previously expected.
The nonrecurring accretion in the second quarter attributed for over half or nine of the 19 basis point compression thing this quarter and the remaining 10 basis points was related to five basis points from PPP learn three basis points in margin and two basis points from excess cash.
Comparing the first quarter margin of 370 to the third quarter margin of 364, the margin declined six basis points over those two quarters, which was exactly in line with our projections of low to single mid digit.
Low to mid single digits on per quarter compression and our net interest net interest spread actually increased from 333 in the first quarter of this year to 340 in the third quarter John.
During that same time period, the first quarter to the third quarter, our yield on earning assets declined by 55 basis points, but our funding costs decreased by 62 basis points.
Our core loan production yields declined to 4% for the quarter against for 16 last quarter and on the deposit side, we continue to see success in growing noninterest bearing deposit.
That's what our total deposits grew 474 million in over 66% of that growth was in non interest bearing non it.
Non interest bearing a Palmer said now represent 36 point.
0.8% of our total deposits compared to 29.9, this time last year and while a portion of these deposits less than 30% are related to PPP loan proceeds the TPP pricey loan and deposits happens stickier than we first expected.
As I previously mentioned, our third quarter provision expense was 18 million.
Approximately 27 million was recorded for loan losses 1 million was reported for other credit losses, and then we reversed about $10 million of previously recorded related to unfunded commitments. So our total net expense was the 18 million.
We had approximately 3.6 million of net charge offs during the quarter and our ending allowance for loan losses was 239.1 million compared to a late at the end of the second quarter and 38 million last year.
Including the unfunded commitment reserve, our total allowances to 60.4 at the end of the quarter compared with 246 million at June 30, and $39.3 million at the end of the year.
Growth in our non interest income was record breaking during the third quarter, our mortgage group had record production efficiency and earnings due to the interest rate environment mortgage production hit new record levels at just over 2.9 billion for the quarter and our gain on sales increased to 392 up from 353 last quarter, we had hit.
To pay that gain on sales the decrease back to normal levels in the 3% range net.
Net income in the retail mortgage increased to $61 million for the quarter and while pipelines remain strong going into the fourth quarter. We do not expect this level of mortgage revenue to continue.
Total non interest expense declined from 155.8 to 153.7 for the quarter. However, when you remove the covered expenses merger restructuring certain legal fees and the wofford celebrated that we adjust for adjusted earnings are.
Noninterest expense totaled 153 million, which is up $3 million from last quarter. However.
However expenses in the retail mortgage segment increased 5.1 million due to the variable costs associated with the increased volume and are more than offset by the $29.9 million increase revenues all.
All of our other segments, including the core bank the administrative functions premium finance and as BJ had a reduction of non interest expense and improved efficiencies during the quarter.
This led us to be extremely pleased with our efficiency ratio this quarter, our adjusted efficiency ratio improved to 47.34 compared to 51, who eight last quarter.
The additional mortgage revenue in the efficiency gain in the mortgage division significantly impacted the TCE ratio and we do believe the ratio is going to increase back in the 53% to 55% range in future quarters, as we don't anticipate the level of mortgage revenue and efficiency to be sustainable.
On the balance sheet side, we had cautious but solid organic growth both on loan and deposit loan growth was 440 million or 12% annualized at about half of that growth was related to the warehouse was in mortgage that brings one growth for the year to 2.1 billion, including PDP and 1.1.
<unk> billion or 11% annualized excluding PPP.
As Tom mentioned, we have several headwinds coming into the fourth quarter, such as cyclical warehouse chaos I go on seasonality as well as indirect run off so we believe our full year 2021 growth will come back in line with our original estimates of mid single digit for 2020 more.
More details of our loan production can be found in the investor presentation and as I know.
And as I mentioned, our total deposits increased by 474 million during the quarter of which $313 million was in non interest bearing so that loan to deposit growth loan and deposit growth helps keep our loan deposit ratio stable at 93%, which was consistent with what it was last quarter.
With that I will turn it over to Ali for any questions for any great.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using speakerphone. Please pick up your handset before pressing Nicky to withdraw.
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Our first question today comes from Casey Whitman with Piper Sandler.
Hey, good morning.
Good morning Casey.
Great quarter.
I guess I'd start maybe just thinking about expenses in within the banking segment, which were very well controlled this quarter. Just wondering if you could share your thoughts on how you expect expenses within that segment is trending from here you know keeping in mind all the hires you've made to support your expansion and maybe update us as to whether or not.
Any potential for further branch closures or rationalization.
Sure. Okay. So that's a great question. So when we look at one of the things that we've really been focused on every mentioned several quarters is that we are trying to find a way internally, we're calling it a reallocation of resources to pay for some of these new hires and pay for the the new innovation that work that we're doing so and as we have.
Previously mentioned in June we are closing, we do have the branch closures. We actually have eight branches that closed October 1st said those cost saves or not in these numbers yet and we have one additional branch closing that's in process has been announced and is in process. So those cost saves will come in to the fourth quarter and then that.
Well help offset any of the additional growth in expenses. So we are trying our best and I know some of the executive team is getting tired of me, saying no to certain things, but we are really trying to keep our noninterest expense as stable as possible going forward and trying to find ways internally through efficiencies and technique.
Allergy to pay for those additional costs.
So I guess it okay got it is somewhat flat.
[laughter].
Perfect that's very definitely very helpful. There.
Thank you [laughter], Okay, and then maybe.
Maybe just starting or thinking about the movement in problem assets. This quarter can you give us some more color on the uptick in particular on the residential mortgage non accruals I think you noted the majority had expired deferral program. So is that the basket of small abolish borrowers and are these borrowers so they're just not able to make payments and rather than.
Excluding deferrals, you moved to non accrual or sort of what's what's going on with them within that bucket.
All right I appreciate given the opportunity to do provide a little color on that let me say really three things and I really address all of the M.P.A. changes here not just really the residential ones, but let me say virtually all of the change was related to cope with it so it's.
Important to note that we really didnt have any surprises that came out of that yeah, we've been saying for a while it hotels were going to be the issue. So changes in watch list changes in Tdrs and things like that are really highly concentrated in hotel borrowed.
But from the aviation side, the commercial at least on the commercial side. There were really only two significant changes one was a larger hotel loan and the other was a restaurant that decided to close it is in the process of liquidating their real estate I look.
Look if the collateral position we have in each of those and I feel pretty confident that we're we won't really see any loss in those.
Specifically I know your question was on the residential side. So we saw an increase of about 100 loans on the residential side 106 loans that we added to the team.
See that non performing list.
The average size in that portfolio was a $425000. So its well diversified it. It's not you know any loss that we might would look at and that's not going to be that significant for us.
But really what that represents is bought our borrowers that had come out of a cares Act deferral program.
But had not yet confirmed or told us their intentions to either resumed payments on their loans or go back into another one of the several options that the cares Act has so so we were in this middle point of not knowing whether they were going to resume payments.
Or take their take up another carriers that program and so we took the position that we would call those non accrual until such time as we were that we.
Yeah, we were settlement in the direction in which they were going some may stay non accrual I do believe that a portion of those will enter a cares act as you know there's there's a longer term period that they have programs available. So there are programs that they can then.
Her into a again several different options and sales.
A portion of those may settle in the fourth quarter and come out of the NPL bucket, but I felt it was a very it was appropriate but a conservative approach nonetheless to consider those nonperformers and Casey This is form or the other thing to note on these as John said I think it's a very conservative approach.
Because the majority of these individuals are entitled to extend their payments. Another six months through all these different programs, but they haven't declared that we could easily said well they've got another six months and kick came at a rather than what we were trying to do is take more conservative approach to it and we have not heard from when we were going to head calling it the way we saw.
But the other thing to note too is if we really want to be consequential with the earnings we had this quarter. If you wrap all those loans up we could charge every that was loans all still hit consensus and may make some meaningful money this quarter.
Okay. So it sounds like these loans actually haven't missed a payment yet and this is just kind of a timing thing and we'll see which ones yet there's still a lot of that new product or okay, yeah, they're entitled to additional deferments, but they have not they you have the option of either bringing the payments current or tapping them onto the end of your loan.
And if they have not responded to it and in such fashion in terms of their intent. There. We just went ahead and took a conservative approach.
But like John said it you find a lot of these people either tack it on it in a loan or make payments and then all of a sudden they come back off nonaccrual, but until that time, we just thought we'd be conservative and take that approach.
Okay, and the 106 loans you referenced how big is that bucket dollar wise.
40 million 40.7, okay make sense.
Okay, and then just one other quick one but you referenced the larger hotel loan is that the one that moved on to non accrual or into Tdrs and kind of how big was that.
It was a no it was a little less than that 17 Im sorry 80.7. This is what we quoted on the slide deck. It. It was the it was non accrual. It also created a TDR. So its in on our earnings table. It's in the non performing TDR.
Good.
Okay.
And maybe just broadly the movement of hotel on into the performing TDR category. This quarter, maybe you can speak to that too.
I can so.
Just DDR as a general over 80% of the new newly created Tdrs for the quarter were in hotels.
I will say on the other side do the last slide deck, we put out would have been I think sort of mid September numbers, and and we had about $240 million worth the hotels that were seeing noted is still being in phase two of the payment deferrals and we we only add.
At 130 is that to the watch list and so you know what that whole bucket. There was a significant portion of that group of hotel loans that that did resume payments like we expected they would but that last group and its a.
And it's a variety of reasons in a variety of locations just needed that longer runway and and I told our folks did I didn't want to do this and for another 90 days I really wanted to.
I didn't think the hotel sector was going to heal a 90 day. So I told them that if we weren't going to do something through the middle of next year. It really wasn't worth it so taking that stance, we certainly would have create.
Would have created the PDR, but we tried to work with our customers to a length of time that would give them the best opportunity to.
You know to get back to some level of normalcy.
Understood. Thank you for all the answers and great quarter guys. Thank you.
Thank you.
Our next question comes from David Feaster with Raymond James.
Hey, good morning, everybody.
Hi, David.
Again, congratulations on a stellar quarter I just wanted to follow up real quick on that hotel portfolio do you have the reserve allocation to the hotel portfolio and then maybe give any updated debt service coverage ratio or LTV metrics based on ER no current.
Forecasts and valuations.
The.
As far as the reserve is concerned.
I don't remember if we've made this comment before but we determined that the forecast models that we were using.
Really I didn't think it would cover the hotel sector that well just because of the kind of the short term improvement and versus really what is needed in the hotel sectors a lot longer than that so we we did separate the hotels out of the normal commercial real estate in established its that grew.
In its own category.
Category in the reserve for the quarter and and looked at it from a from that perspective and also a key factor overlay just because of the level of deferrals and the the new watch list loans and so on so so we did treat that as a separate category from a an overall LT.
Okay perspective, you know the.
I I Didnt go out and get all of those hotels reappraised the values valuations that we did get worse.
Yeah, they werent materially different.
And I think that's just the factor of you know kind of thinking through stabilized I.
Honestly, you take that date and time and occupancy as you're hovering in the mid Fortys to mid Fiftys will clearly you know the bag.
Valuations are going to come down the good part about that is that and I've said this before our hotel portfolio overall started.
So you should say pre cove it was around 60%. So we have the capacity to see a revaluation, even at 20 or 25% and only have that portfolio stretch to say 75 or 80 overall LTV. So so it's a it's a it's a good portfolio from the collateral perspective.
I'm not as worried about losses as I am about just giving the hotel sector healed.
Right that makes sense and then just switching gears to loan growth you guys have had terrific organic loan growth great XE, the new new hires recently I guess, how do you think about the pace of growth as we entered 2021 I. Appreciate the color on you know the have the you know the seasonality in the fourth quarter.
But obviously, we've got the Tailwinds of the economic backdrop, you know the new hires Hayden I'm just curious how you or how you think about organic growth as we enter 2021.
Yeah, but I would tell you that the the pace of the growth will be measured.
I will also tell you that the type of growth, we're having a lot of it is as you mentioned earlier, we had a lot of significant new hires, especially on the Cnf front and those individuals are going to be contributing in a meaningful way a lot of it is going to just be taking business from other banks. So its as I had said in the past is not going to be.
More aggressive issues will be more active and so that's where I see a lot of the opportunity for us as we go forward.
Okay, and then just kind of what's the pipeline for new hires you guys have done it vendors job hiring new guys across across your footprint and even if it's new new markets is what does the pipeline for new hires look like in.
You know when you said you're going to be able to continue to you know true it's kind of been able to be a bit more defensive odd just given the pandemic, but just how do you think about starting to pick off more lenders Marin and gaining share in that middle market from that.
Yeah. Good question I think you know the defensive posture a lot of banks have been able to take or has is a luxury because I think thats coming to an end and at least in the southeast because we are as I mentioned in my prepared remarks.
We are fortunate to have had a strong presence southeast because business here as it continues to.
Prove that being.
That being said the pipeline of new candidates is it's exciting in terms of the opportunities there, but we're also having to be measured and layering in those expenses and be mindful of the cost associated with that so.
We will continue to layer in that expense and that overhead as we've got the extent sales to cover it.
But the pipeline will continue a panel it continues to be robust and a lot of it has to do is in fact, when you bring on the I call. The Influencers yeah, they've obviously got a pretty loyal following themselves having come from other institutions. So a lot of that pipeline is made up of new talent from a potential new talent.
From they are new hires.
All right. Thanks, guys again, congrats on great quarter.
Thank you.
Our next question comes from Brady Gailey with KBW.
Hey, Thanks, good morning, guys.
Morning, Brady good morning.
So you've got a pretty good job of holding a.
Holding the the NIM relatively stable.
Relatively stable year to date, a lot better than a lot better than peers.
Yeah, I know you've talked about this kind of low to mid single digit decline per quarter, which is what we've seen.
Nicole do you think the margin is close to a bottom here at three six before or do you think we should continue to shape to think about NIM shrinkage.
Going forward for the next year or so.
Very that's a great question and I think that as much as I wanted to be the bottom I don't think it's there yet so as we model out and we are there's been very aggressive on the deposit side and I'll tell you one of the things. This this cycle is that everybody has been aggressive on the deposit side, which you. We don't we don't really see any crazy.
Competition out there, which has made it available so that we can be competitive and reduce on the deposit side. So we continue to look for opportunities on the deposit side, but I do still see was single digit compression for at least the next two quarters. So you know five just.
Five to six basis points over two quarters. When you look at our CD portfolio, we still have about $560 million. That's currently at a 136 that will reprice between now and the end of the year our production rates in the third quarter was 46 basis points. So if we can get that that you have $560 million at 133.
Next to reprice down significantly that.
Significantly that will be one of our biggest wins for the fourth quarter and then we have about another 1.3 billion over 2021 that will reprice and that's at a lower rate that stuff actually at a weighted average of 98 basis points as not not as much rain, but there is some room there for it to come down as well.
We continue to look on the other deposit side and deposit deposit products and then really the other thing is on the one side is that we we internally have said that we're kinda Street fighter smoking for every basis point that we don't have to go you know we can compare it we believe that we will compete on one basis point and not just now.
Nearly 25 basis point increments, so anything that we can do to protect the margin our bankers have been very very cognizant of that very successful in doing that they've done a great job, but I do see a little bit more compression before we bought them out.
Okay, and then on the buyback I saw the extension of the day.
About 86 million left on that authorization do you think.
You'll be active on the buyback in the near term into stocks still pretty cheap at one three times tangible.
Is that something you plan to act on the near term or not yet.
Not yet.
As I said I don't I don't anticipate any activity there really there between them into the year, but its we didnt want to have that readily available in the event that we we chose to do so.
Finally for me your Palmer, it's great to see all these talented high.
Talented hires that you've done this year, maybe on the non organic side I know related to M&A.
I mean, it felt like you were a little more upbeat on M&A on the call last quarter. So just an update on kind of how you're thinking about M&A I'm going forward.
Well I'll tell you we're focused on on growth and good measure controlled growth and whether that be organic or M&A. If the right opportunity comes along but you know I think is.
I think as we look at M&A. The most important thing for us is to be well positioned and to be in a position of all sense regardless of what.
Gets thrown our way and like I said, we like to focus on the things we can control and then mitigate the things we can't control. So I think the most.
My comment last quarter really pertained to the industry I think you're going to see some significant.
Today activity as we get to the end of this this pandemic.
And a lot of that is activity that has been bottled up quite frankly for the last several quarters. So I think you'll see a sudden surge in M&A activity.
We are focused on growing the company organically.
It M&A opportunities come along that makes sense and they're accretive and the earn back and where the currency is where it needs to be to be able to allow us to participate in M&A. We will we will certainly consider that.
Okay, great. Thanks, guys.
Thanks, Larry.
Our next question comes from Kevin Fitzsimmons with D.A. Davidson.
Hey, good morning, everybody.
Good morning, Kevin.
Nicole I just wanted to follow up on the margin outlook. So the low to mid single digit compression per quarter is the way to think about that as you're talking more about the.
The the core margin and then the P. I can switch.
Swing within some kind of some some range quarter to quarter, but is the way to think about that is staying roughly the same with what we've got this quarter.
That's right that's right you got it exactly right.
Got it.
Okay, and then if I could just ask about TPP I know, it's it's it's you know a moving target in terms of how the U.S.P.I. is reacting to it but if we were thinking last quarter that the juice of the origination fees would flow through the margin mostly in fourth quarter or is it now reasons.
Both be pushing that mostly into first quarter. If we're assuming that the forgiveness. You know starts to heat up later this quarter, but the bulk of it.
The loan payments end up happening in the first quarter.
Yeah, I think that it's it's a question of the day is when do those forgiveness when did they start grainy forgiveness and when when do those loans get paid off and when do we take that and so I have continued to model that with just the just the normal amortization and so I do not have any of those that potential tailwind or headwind tell.
I'm, sorry on any of that potential tailwind built into my guidance. So I'd also kind of assume that as we get some of that tailwind of early pay off that we start having that income I assume the street and analysts would you know kind of doing an office and possibly exclude that so certainly as that as that comes in you knowing that we still have.
$30 million or so of deferred revenue, let's see that'll come in others are forgiven and that would certainly help help the margin, but I don't have any of that build and when I say the margin compression.
And as far as your timing.
Fourth quarter first quarter second quarter, I know, that's a three quarter window [laughter], but I think we're really going to see it starting to come in probably fourth quarter first quarter.
And just as fast as the FDA, where it where they're kinda discretion as to how fast they work through those.
Right.
Okay and.
Just I know there's been so much focus on the hotel exposure and.
Industry wide and appropriately so, but I think for the banks the real when investors look at the risk it's more about if.
Economic weakness spills over into commercial real estate more broadly and polymer you made the point earlier that the southeast is really doing very well and it's been open for quite some time and that's benefiting is where I think there are certain pockets more like New York City and more urban areas that have more distinctive issues the dealing.
But what what are your observations and expectations based on what you see today I would assume you're keeping a close eye on that and.
I'll just what makes you feel.
Comfortable or what what gives you concern today on that subject.
No you're exactly right and we keep an eye on each each line of business and more specifically each individual vertical and I think we kind of break it down and John and his team do an excellent job in terms of getting granular to you're looking at retail centers versus office versus industrial unit, an industrial market throughout the southeast.
Extremely strong and robust it's it's amazing how well that's performed.
Obviously, the hospitality is impacted office dependent on the office, where it is we don't see as much impact there on a broader basis and a lot of that in dealing with a lot of the large commercial real estate firms that we get a lot of our data from they while there are certainly people that are moving around in terms of square footage.
They need they're not seeing a lot in the way of default and nor have we own our portfolio retail I think you have to look at each specific credit. There you know if you've got a a credit tenant or an anchor tenant lot of ours are for instance, like a public shopping center, that's a very different.
Type of scenario the one that's in a more suburban retail center and so we keep a close eye on those but overall when you look at the southeast is like I said, it's a very different market than a lot of the other banks are experiencing in most of our credits as you well know or in the southeastern footprint.
So right now we're we're cautiously optimistic but certainly you know we've got a very conservative credit culture here and if we see anything but that looks at it.
Out of the ordinary we're going to go ahead and address it but right now that being said I think John John gets a report regularly in terms of the on the retail side for instance, which is where we got a lot of focus in terms.
In terms of the payment from the tenants to the landlords and right now our collection rate is still running around what the 99% or better which is pretty impressive.
And so.
So we feel.
Obviously optimistic probably the best way to put it.
Okay. Thanks, very much huh.
Our next question comes from Christopher Merrimack with Janney.
Hey, Thanks, Good morning, Palmer can you update us on the Augusta initiative and should we expect additional hires and new business flows there.
Yes, Augusta is going to be a bright spot for us when you look at 2021 somebody earlier to ask about growth as you all know reamer Brinson joined us and he is.
He is well known in that market east covering the Augusta Savannah, the kind of the coast force there and we will definitely have some additional meaningful hires there to take advantage of that opportunity I think Augusta often times overlooked when you look at Georgia, because so many people have tendency to focus on Atlanta, but Augusta vibrant.
Market, it's got a tremendous amount of opportunity and quite frankly, I think it's underserved in terms of banking. So remember it's going to take full advantage of that we're going to take full advantage of his talent. So the answer.
The answer to that is yes, there will be additional hires in that market.
Okay, great. Thank you for that and then just back to the mortgage business in general I mean, how sensitive do you think the mortgage businesses to the.
The 10 year rising a little bit I mean should we think it did as coming off the bottom and that's an issue or is it more that it's still half of where it started the year.
Well I think you and depending on the the magnitude of the rising how quickly. It rises you kind of get that shocking that does kind of have a create a pullback but right now rates are so low and inventory levels are so low that I think there's more of an impetus for people to go out and purchase a home today. So.
I look at Chris our locked pipeline and when I look at the locked pipeline even into the fourth quarter, it's very encouraging to see and I don't see a lot of fall out in the pull through rates continue but I do think it you know if we have a shock to the 10 year and had a rapid escalation. There I think you have a lot of people that will get off the fence immediately see quite frankly.
Probably see a spike and then you'd probably see somewhat of a pullback.
Got a polymer thank you for the additional color I appreciate it.
You bet.
Our next question comes from Brody Preston with Stephens, Inc.
Good morning, everyone.
[laughter].
Hey, I just wanted to do a fantastic question I appreciate the slide you guys put in there on on the CRB production.
I ask if it looks like Youre, maybe over the last quarter or so they have gotten a little bit more conservative from an LTV perspective, just wanted to know if that was intentional or if that's just how it worked out in the numbers.
Well that that's a great question and I appreciate you, bringing it up because it is been somewhat intentional I think I mentioned as coated kind of came honest and we made a few changes to our underwriting and one of those things was that we were looking for a little more equity and in a lot of cases.
Trying to get payment reserves that would take us out to a place beyond what we thought at the time was coded. So yes. It was somewhat intentional it was intentional for us to do that.
Okay. Okay. Thank you for that and then our I'm, assuming just given those are new originations that those are being underwritten that.
Service coverage ratios and Ltvs that are based on current values and cash flows and so just wanted to better understand.
Better understand if you could give us a sense for how values for similar asset classes have changed over the course of the last year.
Well that's a good question and you know as I was mentioning earlier, the the economics, especially in our four state footprint have not I mean were you know.
But it's looking to underwrite to a new hotel loan so the sectors that have there we're still underwriting into are not.
Hasn't really been impacted enough to where valuations are coming in you know.
Minor what you would expect from last year so they.
They've held up fairly well and you know we stick to those sectors that have been less impacted and we just haven't seen a material change in valuations there.
Okay.
Okay, Great and then I guess, just one more around the sort of LTV topic I did notice just the grade five loans, which I know are performing but they have ltvs that are above 100% based on the current collateral those ticked up a bit and so I just wanted to get a sense for if you had started report reappraising or some of those loans and if that is.
What drove it and if so if there is any specific asset class that drove the increase.
That's a good question that there are several reasons beyond that that we would grade to a loan of risk grade five and and honestly. The majority of what the change was during the quarter was the reflection of those loans that were still in deferral. So yes.
Yes, we did do a updates on evaluations certainly on problem loans potential problems great fives.
On a few maybe but primarily what you see in that is just the fact that if we had a borrower did entered that second phase.
Felt like that we would we wanted we would grade that have five at best until we got clarity as to whether they were going to come out fine.
Fine on the other end or whether they were potentially going to see.
You know some something else something worse happen.
Okay, and then you guys gave some pretty good color earlier on the mortgage portfolios. It rolled out a deferral and intend PA. It seems like that was relatively idiosyncratic and so I'm assuming that there is not there haven't been other asset classes that have immediately rolled out a deferral and then 10 P.A., they're just kind of started resuming normal payment.
Fair.
Yes, that's fair I mean, obviously the the two loans I mentioned on the commercial side rolled out of of deferral and and.
Did not have the capacity to continue and needed a third and so we put those on non accrual, but but nothing like the residential side. It was not that widespread it was just sort of a loan by loan.
Okay.
I had a couple of.
Just a clarification on the loan portfolio just wanted to better understand what drove the you know the $125 million decrease in consumer installment Im sorry, if I missed that and then the indirect auto run off or how much of that do you expect to sort of run off quarterly and when do you expect that before portfolio to be.
Completely run off.
Yeah. That's a good question you see actually I think that's a little bit one in the same answer because.
Because the decrease the portion of the decrease in consumer loans was a reclass of about 49 or 50.
Into held for sale.
50 $50 million of Reclass from held for investment to held for sale, but the indirect portfolio amortization was about $120 million for the quarter. So so that really hit the majority of the the consumer portfolio I think the decline.
John is primarily in that.
As to the the balance remaining in and the amount that it would run off were now that that amortization has been fairly consistent over the last few quarters. So you can kind of sort of just see that I think over the next couple of years.
It's probably the the duration that will will have remaining on it.
We okay and that slowed down a little bit because it does it right.
[laughter] awkward and portfolio their credit is just total extremely well during this downturn very similar to the last one.
Yeah understood.
I do have a question on the S.P.A. <unk> you noted that the gain on sale for that increase towards your team sort of refocusing post PPP. So wanted to understand is that sort of repeatable moving forward and then you know how big is the pipeline and whereas pipe paper pricing right now given that we're coming out of a risk.
Russia, then so on a zero interest rate environment.
Yes, the premiums are still pricing very favorably right now you're looking you know to 110 and above and so that's still a very attractive option for us obviously to sell the guaranteed portion, but the we are rebuilding the pipeline it it can't build fast enough as far as I'm concerned because.
I think that paper is very meaningful in during the this cycle.
Even that much more important to continue to build it. So our pipeline is it didnt close back to where it used to be but obviously as the focuses has moved back from ppt to a normal organic origination.
See that continue to grow and that's also an area, where we hope to find some new originators to help supplement that SB eight growth.
Thank you for that and then just last one from me the I just want to get a sense. If you had made additional mortgage hires to sort of help with the with the volume that you're seeing or are you simply doing more with less and then as we think about next year. You know obviously the efficiency ratio on that business line as you know probably best in class.
And that 40% and so as as revenue kind of as those originations and the mortgage banking revenue declines.
Is it going to be dollar for dollar with expenses or should I expect some of the expenses to kind of stick around a little bit.
No theres going to be a lag effect, but I will tell you that as quickly as we have moved to a adapting to absorb the increase in production, we would move equally as quickly to eliminate the expense and that's a very scalable business, but you do have to be you don't be premature, but you do have to be consequential.
And right now we have not added to answer your earlier question. We have not added any new additional teams. This is really production with our existing teams and they're all just on a great run rate right now and in the pipeline going forward is reflected in that as well and and we continue to see a meaningful amount of purchase versus refi business and that's all.
Encouraging to me I love seeing the purchase business continued to increase so we're kind of even in this low rate environment. We're still running at about 50, 50, and I would like to see that get up even higher on the purchase side I think it will it is married I mentioned earlier, if we start seeing rigs come up a little bit, but I view that more as a positive but that being said.
That being said because the business is scalable you've got to immediately react to that and accordingly to maintain to kind of efficiency ratios that we expect a mortgage company and leadership there has.
His proven that they are able and willing to do that.
Awesome. Thank you for taking my questions I appreciate the time everyone.
Great. Thank you.
Your next question comes from Jennifer Demba with Suntrust.
Hey, this is Brandon keying off the Jenny.
And I'd, just say Hey, I just had one question or is there any consideration or any potential bulk sales or problem loans versus more hotel booking.
Has there been considered.
I just want to know.
Well you know as we look for brand and that's certainly an option that we would consider it so much of that is obviously driven by pricing.
And what kind of price than we have in the market and what we are willing to accept so that's certainly an area. We will keep in our quiver if it's appropriate to do so so.
So I wouldn't tell you it's out of the realm of possibilities, but it would have to be we have to feel comfortable with the sale price for that to happen.
Okay. Thanks, that's all I had.
Great. Thank you.
This concludes our question and answer session I would like to turn the call back over to Palmer Proctor for any closing remark.
Thank you I'll rafat once again by thanking everybody for listening in this morning and in closing I will share with you that we're extremely excited as you can tell about the future and the progress here to Myrisk.
It's nice to know we've got all our conversions our integrations all of that is behind US. So were full speed ahead in terms of our opportunities that are in front of us and you know that sounds strange, but even during these uncertain times, we feel like we're extremely well positioned we're focused and disciplined and and were focused on the things we can control and as I mentioned.
Earlier, we're still preparing for the things that we can't control, but then there's team remained strong disciplined and focused on the future and we see a lot of upside going forward I just want to thank everybody. Once again for participating this morning. Thank you operator.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.