Q3 2021 Ameris Bancorp Earnings Call
[music].
Good morning, or good afternoon, and welcome to the <unk> Bank third quarter earnings Conference call. My name is out there, but it'll be your real prices today, if you'd like to ask a question during the Q&A portion of today's COO. He may do so by pressing star one on your telephone keypad I will now hand, you over to Nicole Stokes Chief Financial Officer, Ken to Nicole. Please go ahead, when you're 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 Amerisafe Dot Com I'm joined today by Palmer Proctor, our CEO and Jon Edwards, our Chief Credit Officer.
Palmer will begin with some opening general comments and then I will discuss the details 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 filings, which are available on our website, we do not assume any obligation to update any forward looking statements as a result of new information early developments or otherwise except as required by law.
Also during the call we will discuss certain non-GAAP financial measures in reference to the company's performance you can see our reconciliation of these measures and our GAAP financial measures in the appendix to our presentation and with that I'll turn it over to Palmer for opening comments. Thank you Nicole and good morning, everyone I want to thank you all for taking time to join US This morning third quarter.
2021 earnings call, we were very pleased with the third quarter and the momentum that we have the loan production.
Actual results.
He'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 get fourth quarter, we earned $83 9 million or $1 20 per diluted share on an adjusted basis.
We ended at 151 return on average assets.
He is 17 six five 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 2.8.
Eight six reported in the same period last year.
The 2021 results represent a year to date ROA of 179, and a year to date return on average tangible equity of $21 38.
Our adjusted efficiency ratio this quarter was $56 five 6% an increase from the 54, 7% last quarter due to certain nonrecurring expenses during the quarter and that said our year to date efficiency ratio was 55, 5%. It should return below 55% by the end of the year.
We remain very encouraged by our organic growth both on the loan and deposit side and exclusive of PPP loans grew over $250 million or 7% annualized during the quarter and that leaves our year to date annualized loan growth of eight 7% excluding PPP runoff.
Three 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 noninterest bearing deposits, which now.
For over 40% of our total deposits and Nicole is going to discuss our excess liquidity and the impact obviously it has on the 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, we're very focused on change.
Book value growth and this quarter was no different.
I'm happy to report, we grew tangible book value by over a dollar per share or three 8% during the third quarter alone and we've grown tangible book value by $3 77 sensor almost 16% for the year, so far and this equates to over 20% annualized growth rate and tangible book value, which is very meaningful our TCE.
Ratio increased to eight 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've been well over 10%. So clearly we have ample capital to support our growth initiatives and consider opportunistic transactions.
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 31 of next year, we did repurchased $6 5 million during the third quarter and that leaves approximately 79 million left on that program and why.
While we don't anticipate executing on this during the remainder of 2021, we do like having the optionality if the right opportunity presents itself.
As for our dividend, we still remain very comfortable with where our dividends are today John.
John Edwards, our Chief Credit Officer is with US today, and he 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 $127000. So zero charge off ratio compared to $2 6 million of net charge offs last quarter was seven basis points.
Our nonperforming assets as a percentage of total assets was consistent with last quarter at 32 basis points.
Loans that remain on the full at the end of the quarter were approximately 6% of total loans, which is down from approximately four 3% of total loans at the same time last year, our allowance coverage ratio, excluding unfunded commitments was 1.18% of our PPP loans at the end of the quarter.
I'll tell you you know despite the uncertainty, but it'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.
On recent Harris for future has to deliver our growth targets and that's that's a meaningful distinction for our company and I'll stop there and I'll turn it over to Nicole to discuss our financial results in more detail.
Thank you Palmer safer.
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 loss of bank premises and the merger charges for.
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 actually those same items I just mentioned.
We were pleased with our operating ratios our adjusted return on assets in the third quarter with $1 51, and our year to date adjusted ROA was 179, our adjusted return on tangible common equity was 17 65 for the quarter and 21 38 for the year to date period.
Palmer mentioned tangible book value increased by $1, one or three 8% that was up from 26 45 at the end of the second quarter to $27 46 at the end of this quarter for.
For the year over year, comparing September 30 last year to September 30 of this year, our tangible book value increased $5 per share or over 22% from 20 to 46. This time last year.
In addition, our tangible common equity ratio increased five basis points to 888.
And its increased 61 basis points over the past year from 827 this time last year.
Approximately $3 million of excess liquidity on our balance sheet and that negatively impacted this ratio by 144 basis points. So if you took that cash out of our assets. Our TCE ratio would've been about 10.32 at quarter end, which was well above our stated target of 9%, we continue to be well capitalized and we feel come.
With our capital and dividend ratio.
Moving on to 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 it. If you look at our net interest income exclusive of accretion and P. P. P kind of getting to that core NII increased $3 4 million this quarter over last quarter and $1 7 million this quarter.
This time last year.
And that shows a real positive trend as people have wondered what happens when you clean the P. P. P runs off.
Our net interest margin declined by 12 basis points this quarter from $3 34 to $3 22.
Our yield on earning assets declined 14 basis point, but our funding cost helped offset that by two basis points. When we look at the margin we really have a four factors.
At eight basis points of our margin squeeze came from our excess liquidity that continue to add this quarter.
Three basis points came from compression from the our two by three basis points of the compression came from the $2 million decline in P. P. P income and then there was another about three basis points of decline related to the accretion income decline I said, that's about a 14 basis points of asset compression offset by two basis points of improvement.
And our funding costs.
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 P. P P and accretion decline.
Also on slide eight you can see that the tabled.
Table to the left of 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.
We remain focused on our deposit costs and we continue to grind them down we still have some room for improvement in the CD portfolio, but the real driver to an improving margin is putting that excess liquidity to work with.
We continue to anticipate net loan growth net of P. T. P activity next year in the high single digits kind of at 7% to 9% 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 run off.
And then also to begin buying investments and to fund opportunistic if either 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 when would that Palmer mentioned the recovery versus charge offs helped offset the need for additional.
On our lung glad.
Our ending allowance for loan losses was $171 2 million compared to $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.
Noninterest income declined $12 7 million this quarter due to decreases in mortgage banking activity as shown on slide 11, the retail mortgage originations now represent.
17% of our pre provision pre tax income for the third quarter and that was down from 49%. This time last year production in the retail mortgage group declined about 14% to $2 1 billion for the quarter and similar to last quarter, our noninterest expenses declined about 8% or $4 4 million in the retail.
The division.
The average gain on sale increased to $3 17 for the quarter compared to 2.77 last quarter.
And the open pipeline. This is encouraging the open pipeline at the end of the third quarter was $1 9 billion compared to $1 seven at the end of the second quarter.
Total noninterest 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 noninterest expense actually declined $120000.
As I mentioned mortgage revenues mortgage expenses declined about $4 4 million during the quarter, but those savings were offset by increases in other areas I'm, including inner what enterprise wide services and support staff a lot of those increases in the majority of those increases were related to increased legal and professional fees and other one time.
Lenses that are not expected to be recurring.
Because of these nonrecurring expenses, our adjusted efficiency ratio for the quarter was 56 point 56 versus $54 seven 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 lets see on slide 16, we had 471 million.
A headwind against $515 million growth in CRE, C&I premium finance and residential.
P. P. P loans declined 208 million in indirect loans declined 72 million. So excluding that P. P. P run off our loan growth was about 7% annualized.
We have about $280 million of P. P. P loves left and we have about $325 million of indirect ones left.
So we really anticipate the headwinds from the run off in both of these portfolios to subside early next year.
While I'm on P. T. P. Just a quick update there we've received payments and forgiveness of just over $1 billion on round, one leading 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.
Oh 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 loan, which again, we anticipate amortizing into income over the next three quarters.
So we already discussed the excess liquidity that you can see in our other earning assets on the balance sheet due to the tremendous deposit growth. We saw this quarter deposits grew $575 million, but the real key here is that noninterest bearing deposits grew 633 million and our interest bearing decreased about $58 million.
At Palmer mentioned are not our noninterest bearing are now over 40% of our total deposits.
This is just really key as our bankers have continued to grow noninterest bearing deposits to fund that future growth and I said last quarter. We do anticipate some deposit run off his wife starts to get back to normal post pandemic and its rate potentially right.
So with that I'll 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.
To ask a question. Please I'm sure you'll head says fully plugged in and on music locally star followed by one telephone keypad.
Our first question today comes from Brady Gailey from K B W. Pretty please go ahead.
Hey, Thanks, good morning, guys.
Good morning Brady.
So I just wanted to start with mortgage fees, if you back out.
The noise related to the MSR mortgage fees were down about <unk>.
17% linked quarter, which is a little more than I thought they would be.
So maybe just any kind of comment on that.
That decline did it surprise you guys. How are you thinking about your mortgage as we head into 2022, I know, it's a tough thing to predict.
Sure Friday already the I'm, sorry about that.
We're learning a new system on our end the conference call. So I picked up the wrong name sorry Brady.
So on the on the mortgage revenue side, a lot of that has to do with timing and then 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 and it affected the third quarter because the second quarter was so elevated that that timing.
As you said, we do and 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 went we anticipate like they've got pair off C that we discussed in the press release them to go back up a little bit next quarter and it should rebound.
And more importantly to Brady I think everybody saw the improvement in the margin there that bounce back.
Three we were down at 275, I think last quarter or so.
Between the production and the margin we feel very positive about fourth quarter in terms of mortgage but a lot of mortgage notes, but timing and we have the opportunity to have some meaningful sales at the end of second quarter that obviously impacted third quarter.
Alright, that's that's helpful and then Nicole I noticed the other expenses were up about 7 million linked quarter was there anything notable.
Notable.
And other expenses this quarter.
We did we had some one time, what we call what our one time expenses.
Settled and old.
Legal fees. So we had some additional professional fees related to that and then did the settlement and so we don't expect those to work her and then we also had.
Like we talked about the some lease expense that we're that we're getting out of.
And then also the.
The state tax if you notice our tax.
<unk> rate increased slightly this quarter that that's due to a state tax liability that was just a one time thing and we expect that to go back as well.
Okay, Alright, and then 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 'twenty or 'twenty two.
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 <unk>. Please go ahead.
Hey, good morning.
Good morning, Casey Good morning Casey.
Good morning I'm.
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 I'm, you know without P. P P without accretion sort of.
Given your growth outlook on loan growth outlook for next year sort of what's a reasonable outlook from what you know what we could see growth in that core net interest income next year is that kind of the mid single digits or.
Is that too low.
So thank you Casey I think a lot of that and 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 I mean, you see this quarter and you see excluding that P. P. P 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. You know this quarter, we saw about two basis points of NIM defense coming from the from the deposit side, we still have a little bit more.
Room, they're all in and mostly the C. D side, so that should help stabilize some of the compression that we might see from the loan side, but when you think about you know the yield curve steepening or in the fed tightening and we start to see maybe some upward movement, there and we are asset sensitive and we possess.
And to 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 a 50 basis point Palmer, Bob you know when we start to get them between 25, and 50 basis point of improvement in the in the yield curve was when they were with the fed move is when we'll start really.
[laughter] things an increased movement on the on our NII as well.
Okay understood and just to tighten up the loan growth guide I heard a mid to upper and then a 7% to 9% range is that is the mid to upper kind of how you're thinking about for this year and then potentially getting closer to that seven to nine range for next year just to be clear I think that's right.
Got it right. This year that are in that five to seven range in the next year, it's kind of in that seven to nine and a lot of that is because of the the headwind of the indirect and the P. P. P.
And out next year.
I'll, let someone else jump on things.
Great. Thank you Casey.
Our next question comes from Kevin Fitzsimmons from D. A Davidson Kevin. Please go ahead.
Hey, good morning, everyone.
Good morning, Kevin.
I was wondering if you could and apologies if I missed it if you.
You talked quite a bit about the margin and the drivers for it anything you can.
However, you want to characterize it reported margin core margin in terms of how youre looking.
Out.
Over into fourth quarter, and then into next year, and then 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 was.
Do you plan to get a little more aggressive on deploying it into securities.
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 to eight basis points comes from liquidity and sends in the remaining four basis 0.6 basis points was on the loan side, but it really was all the P. P. P accretion income it came down.
And then just our normal accretion income that came down offset by the two basis point. 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 you know 25 to 50 basis points are coming on rates.
Our are lower than our margin. 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 earmarking, a 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 a deposit run off and then if there was any other opportunities out there that we.
See them you know in the second quarter, we did buy about $100 $100 million of boley well. It doesn't go into the margin. It does go into noninterest income so any type of those type of transactions that 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 <unk>.
And held to 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 and 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 they're watching her departure.
The costs that we know that we can control you know the excess liquidity in the margin ratio and just really focus on focus on the NII number and the growth there.
Great.
Perfect sense.
One additional question I just wanted to get your Proctor Palmer your updated thoughts on M&A.
You know what and maybe if you can differentiate by bank or non bank, we've seen a lot of banks get more interested in bolting on asset generators, given the excess liquidity.
And you know if M&A is still as important 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 thanks. Thanks Palmer.
You bet and that would kind of answer that in one wording is really optionality and that's one of them.
Benefits.
Company here is that we've positioned ourselves to take advantage of opportunities, but that being said.
As you know, we're pretty disciplined here and things have got to make sense to do it we're very sensitive to dilution.
But to answer your question more specifically, we look at the bank and nonbank and if we're able to deploy.
A particular line of business or do linked out somewhere we'd certainly entertain that as well because I think we can all see as we get for the importance of not.
Having a dependency on just the margin fee income piece is critical which he speaks well to our our profile. When you look at the lines of business that we're in and what is the premium finance the SBA or the mortgage so I think we could do things to find it as existing lines. In addition to potentially finding other opportunities for fee income on both the.
The bank and nonbank side.
Great. Thank you.
You bet.
As a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad are.
Our next question is from David Feaster from Raymond James David. Please go ahead.
Hey, good morning, everybody.
Good morning, David I.
I just wanted to start on production you know overall production do you guys have done a really good job until steady just north of about $900 million of past couple of quarters. I guess, how do you think about the ability to accelerate production going forward. You know is there and we've talked in the past about the increased Apple.
Maybe move upstream that does that potentially help or is it new hires that you've talked about.
I'm just curious your thoughts on that production side.
Yeah, I would answer it this way David we're very fortunate with the investments as I touched on earlier that we've made in the last 18 months and there's very little dependency on betting on the comp for the future because we've got 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.
The pipelines are as full as they've ever been and so I feel very encouraged across the board in all lines of business and where 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.
Like many others, we pretty much know exactly where that production is 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 market that we're in right now with Nicole touched on in terms of our anticipation for growth a lot of it is obviously driven by what happens with the economy and the political headwinds but I.
I feel very confident in our ability to continue to grow and that has a lot to do with the talent and there's a lot to do with the growth markets that we operate in.
That's 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 your loan yields have come down, but just curious your thoughts on the competitive landscape from both a pricing and 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 seemed like there was more pressure on the variable side, just curious whether the steepening of the curve is helping new pricing at all.
It might be traveling.
Yeah, I think I think pricing is going to continue to be a challenge in terms of structure I will tell you.
Don't see anybody in our peer group, that's reaching on asset quality in terms of compromising asset quality, which is a good thing.
Because as we all know can lead to major problems down the road.
From what I've seen out there I don't see anybody reaching an all in number or basically compromising on asset quality. What you do see in law along the lines of structure. There are some extended interest only periods.
Being altered the nonrecourse, 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 theres some mitigates there.
We look at pricing as we're going to be very competitive if there's a relationship involved if theres not as simply a transaction that is very different and the other thing I think that's 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 tendency to you came down 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 our pricing as we look forward. We will continue to be very competitive on both the C&I side and M. A C or a fad.
But the only compromise what I'm seeing right now is on structure and kill them get really interest rate risk that you may be taking and then interest only periods and non recourse.
Okay. That's helpful. And then just a follow up on the M&A commentary I mean, there there's a lot of discussion about that everybody's playing matchmaker.
I appreciate what you guys are coming at this from an opportunistic standpoint, and don't need to do something I guess, what's your appetite for maybe more of a transformative type acquisition versus the 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 of transaction, but having just been through an M. O E. Here I can tell you they're very difficult.
Two.
To implement over time, and so you have to be prepared for those 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 her disciplines here.
Okay.
Thank you Nicole if I could just squeeze one more in.
Could you I appreciate the commentary on the onetime 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, where about another three and a half to 4 million.
Okay.
Thank you.
Our next question comes from Christopher <unk> from Janney Montgomery, Scott Christopher Your line is open.
Hey, Thanks, Good morning, Palmer, Nicole can you talk about new hires in both or all of the commercial wealth and mortgage channels, just curious kind of new staffing changes in the future.
Yeah. Thank you Chris for the question.
As I've mentioned before we are we are fortunate in the sense that they hit our current projections for growth. We've got everybody. We need so anything anybody that we added an array of talent is incremental growth and talent in the third quarter in terms of the commercial front, we hired about five folks there and 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, but.
But I think it would be meaningful in that area continues to grow and is a 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 are the talent, we're seeing which is coming primarily from most of them.
Larger regional banks.
On the commercial front and some of those are in our newer markets the Charlotte Tampa.
We're seeing some good opportunities there in addition to added some supplemental our talent in the Greenville, and Atlanta and Jacksonville markets.
Okay, Great and then just a follow up on the mortgage business I know that the gain on sale was better quarter, if you'll disclose this.
So 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 would that play out this next year.
Sure. So we continue to look at the efficiency ratio in the mortgage group and I think he can three C. On the on the mortgage side that he added.
But our expenses continue to go down with the revenues and so we had this quarter.
We did have them because of that there's pair off fees, but are you.
You know they they are still about 80% variable of our expenses and so any kind of change in that in the production is what will drive that efficiency and then we continue to look for other areas within mortgage to find some efficiencies.
And Chris as we touched on last last last quarter to technology is a big opportunity here and a big driver for all mortgage companies and ours included we feel like we've got a good head start on that which really helped us propel us through the opportunities during the pandemic, but that being said as we get for it.
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 of mortgage opportunities that exist as opposed to just through the retail network.
Great and then just to expand on the cost points. So if you have a quarter or year, where production is not expanding theres still opportunities to get the margin slightly better just from purely those efficiencies.
When you say the margins had the gain on sale margin you know is not necessarily but there is an opportunity for efficiency based on on them based on the production.
Okay.
Two separately.
That's right and so really when you think about mortgage mortgage revenue has 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 that the gain on sale goes where obviously the efficiency ratio will get better, but if you if the gain on sale goes down there is not necessarily that that draw.
River 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 in efficiency ratios.
Got it thanks for clarifying that I appreciate it.
Sure.
Our next question is from Brody Preston from Stephens, Inc. Please go ahead.
Hey, good morning, everyone.
Good morning Bernie.
Nicole there's a line in the press release as it relates to mortgage that kind of caught my eye.
You noted that there was an 18 and a half million dollar reduction in mortgage payoff fees compared to the second quarter and another of those fees are typically kind of charged.
The sellers of of mortgage loans as you know they don't fulfill their their agreements I'm. Sorry are you all are a buyer of mortgage loans before you know her for securitization purposes like.
You know what is the what are those pair off skus for you all.
Sure and so no we are not not a buyer of those and what that really has to do with us last quarter because of its a timing issue and because of last quarter. The overproduction and we accelerated the selling of some loans in the second quarter that we receive some compare out some excess we were able to over fulfill some until we got the benefits of that last quarter.
Which is really that drive that coming down this quarter. So it's not necessarily that we weren't penalize. This quarter. It's just that we had some excess or some additional last quarter.
Okay got it and was was there any of that in the gain on sale margin last quarter or is that excluded from that.
It's excluded from that.
Okay understood.
Thank you for that.
Maybe just one on the margin front, and maybe try and that's a different way so.
When I look at you know the the H F by loan income and I strip out the impacts of.
Purchase accounting and P. P. P. You know year over year, you all are down about 2.5% to about $145 million this quarter versus about $149 million in the three to 20 quarter and I know that the I know that the you know the.
The new production yields are a relatively challenging.
But you all have grown core loans, 5% over that period. So I guess help me think about the trajectory I guess maybe of loan income going forward.
Especially as 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 merits I know some of that change post fly them.
But you know in 18 and 19, the banking division was putting on loans you know and.
High fours to mid fives kind of range. So just it just seems like a challenging ramp for loan income. Despite a strong growth outlook from here and so I only think about that.
No I think you're exactly right and like I said, the our projections you know Don if you just take out any fed fed rate or a steepening there if the curve.
That is it's definitely an uphill uphill battle, but our bankers have done a tremendous job, especially I mean this quarter is a great example of that so while we continue to see that coming on rate below our current margin and we continue to see that that squeeze coming in on the loan side. We do have the the growth to offset some of that so you can 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 or are fixed rate production has been fairly stable over the last few quarters is that variable rate production that that's lower and so that will help us and helps us on the asset sensitive.
Sensitivity side, so that when rates do start to move that piece of the portfolio will move maybe as well and will help us in that environment.
The environment.
Got it. Thank you for that and then on the on the Central Slide you'll notice there.
Noted that there was a.
Seven and a half million dollar decrease on specific reserves and you know there were 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.
There was a reduction in the hotel exposure this quarter was it related to that just wanted to get a.
It sounds from what happened there.
That's exactly what happened there.
As we as we push further behind or ahead of the Covid impact.
Hotels certain hotel loans, we're showing improvement through the quarter and they were removed off of the 2014 list.
Got it okay and.
There was $49 3 million of the hotel exposure that was still on the watch list.
That is something where I think you guys did a pretty good job of exiting some of the weaker relationships last year or is that something where you know continue to work with those borrowers or is it are those loans that you've kind of earmarked for.
For natural kind of run off as they mature going forward.
Well.
Really what that is more a reflection of us is some hotels, where faster to heal and others and so we're kind of you know until we get pretty good clarity of the financial performance.
Post COVID-19.
Better and sustainable we left them on the watch list. So what really that is just sort of the remnants of of hotel loans that have yet to really reach breakeven or better operating results, but not necessarily saying that we'll look to do.
To push those out of the bank, but theyre just continuing to just take a little extra time to get over the hump.
Got it Okay, and then I just had one more on the call if I could just circle back to those most pair off fees.
From someone shai should we expect those to be.
In the yearly run rate you know like some of those pair off fees tied to tied to the excess production.
On a fairly lumpy basis quarter to quarter or is that something that you know it was more idiosyncratic to that quarter and it shouldn't be modeled going forward.
The the ladder Youre exactly right and it really had to do with that push in the second quarter two accelerates in sales in the second quarter and so it is typically not as lumpy.
Got it alright. Thank you very much for taking my questions everyone I appreciate it.
Thanks Brady.
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 'twenty. Two so thank you all again for your interest in Marathon, Inc.
This concludes today's COVID-19. Thank you very much for your attendance you may now disconnect your lines.
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Right.