Earnings Call Transcript - ABCB Q1 2021

Operator, Operator

Good morning and welcome to the Ameris Bank First Quarter Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead.

Nicole Stokes, CFO

Great. Thank you, Andrea. 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 Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening general comments and then I'm going to discuss the details of our financial results before we open it up for Q&A. Before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I'll turn it over to you, Palmer, for opening comments.

Palmer Proctor Jr., CEO

Thank you, Nicole, and good morning to everyone who's joined our call today. It's hard to believe at this time last year, we sat on this call with a lot of uncertainty about the pandemic and the economy. But one thing I was certain about at that time was the ability of our team to survive whatever the pandemic threw at us. And here we sit a year later and I'm proud to say not only did we survive, but we actually thrived. We've said consistently that we are focused on tangible book value growth to grow shareholder value. Over the past year, from March 2020 to March 2021, we increased our tangible book value by over 23.6%. We increased our TCE ratio by 4%, while assets grew over 17.5% and we increased our allowance for loan losses by over 19%. In addition, we increased our diluted earnings per share by 29% year-over-year from core operating results, and that's exclusive of provision noise. That's just pure core operating results. This type of success is due to the disciplined culture we've cultivated here at Ameris Bank. And having said that, in my preview, I'm really excited to share with you a few highlights of the quarter and an update on our outlook for the future. For the quarter, we earned $115.7 million or $1.66 per diluted share on an adjusted basis, which is up almost 200% from this time last year. This represents a 2.26% return on average assets and a 27.66% return on tangible equity. Our adjusted efficiency ratio improved from 59.87% reported first quarter last year to 54.62% this quarter. Due to improved economic conditions, we reversed a $28.6 million provision for loan loss expense this quarter, and we realized a recovery of $10.6 million of previous service asset impairment. Exclusive of these positive events, our adjusted diluted EPS still exceeded expectations at $1.34 per share for the quarter. Nicole is going to get into more of the financial details in just a few minutes. On the balance sheet side of things, I was really pleased with our loan growth for the first quarter. Our annualized net loan growth was just over 3%, and that's after the PPP and our indirect runoff headwinds. We still expect to see mid to upper single digit loan growth for the year as we look at our pipelines and opportunities within our markets. We continue to see strong deposit growth this quarter and our non-interest bearing deposits are now over 38% of total deposits. I already touched on capital from a year-over-year perspective. Just for the quarter, we saw great growth in TCE and tangible book value. During the first quarter, we grew tangible book value by $1.58 per share or 6.7%, which is very strong. Our TCE ratio increased to 8.62%, which is getting very close to our 9% goal. Our capital position remains strong, and it's going to continue to support our future growth and opportunistic transactions. And while we do have a share repurchase program in place, we didn't buy anything back in the first quarter. And we really don't anticipate executing on this in the near future, but certainly like having the option to repurchase our shares if the right opportunity presents itself. Jon 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 did want to hit a few high points in terms of credit. Our annualized net charge-off ratio decreased to 12 basis points of total loans compared to 70 basis points last quarter. Our non-performing assets as a percent of total assets improved to 40 basis points compared to 48 basis points last quarter. Loans that remain on deferral at the end of the quarter were approximately 2% of total loans. And that's down from approximately 19% of total loans at the end of the second quarter of 2020. As you know, we have no exposure to oil and gas. And we've included additional details on our hotel exposure in the loan slides in our investor presentation, as well as the diversification that you'll see across all our loan types in the loan portfolio. And our allowance coverage ratio, excluding unfunded commitments, was 1.29% net of our PPP loans in the corner. Just a quick update on COVID and PPP. During the first quarter, we opened all of our retail branches and lobbies. Business and traffic, I might add, is really picking up, especially in the southeast. Vaccines are available to everyone over the age of 16 and they're easy to get. Most businesses that we're seeing are back open, and we're even seeing new restaurants, for instance, coming in and taking over locations that were shuttered last year in the pandemic. So, things definitely seem to be moving back to business around the southeast. And we're fortunate to have a strong presence in many of these top growth markets. As far as PPP, we received payments and forgiveness of approximately $638 million on PPP round 1 loans, leaving the outstanding balance of the 2020 rounds at $463 million. We have the new round 3 outstanding balance at $329 million as of March 31, with about another $42 million funded so far this month in April. We anticipate opening the forgiveness portal for the new round 3 in the next few weeks. So far, we've received over 5,600 applications. Our average loan size request has been around $73,000, with the second request averaging around $103,000. And these participants are first time requests, averaging around $21,000. So, this is a much smaller average balance than we saw in round one, but it's helped increase the overall return. And that's a great lead-in into the last thing I wanted to touch on, and that's ESG. During the PPP process, Ameris had a specific outreach to our certain underserved communities, and it was a great success. And that's just one example of how we've been working diligently on our ESG initiatives. In March of 2020, we established our first chief governance officer role and then shortly thereafter announced our first diversity officer, Karlene Gordon. We have a management-level ESG committee that meets regularly and we report to the board. We are preparing our first corporate social responsibility report, or CSR as they call it, and we hope to have that out in public by the near end of the second quarter so we can share that with all our investors to show them everything we're doing on that front. But I'll stop there now and turn it over to Nicole to discuss our financial results.

Nicole Stokes, CFO

Great. Thank you, Palmer. As you stated, for the first quarter, we earned a record $125 million or $1.79 per diluted share. We reversed $28.6 million of provision for credit loss expense during the quarter due to those improving economic conditions. On an adjusted basis, we earned $115.7 million or $1.66 per diluted share when you exclude the recovery on the servicing asset impairment, the gain on BOLI, and also the gain on sale of premises. Because there's been so much volatility in the provision, I thought I'd mention some pre-tax pre-provision adjusted numbers, where we earned $122.6 million for the quarter compared to $89.4 million in the first quarter of last year, again, taking out that provision noise. That represents a 37% increase year-over-year from true core operating performance. And that's a direct result of the culture of discipline and focus that we've been talking about since the Fidelity acquisition. Our adjusted return on assets in the first quarter was 2.26%, which was an increase from the 2.04% reported last quarter and 87 basis points reported this time last year. Our adjusted return on tangible common equity was 27.66% compared to 25.04% last quarter and 10.98% in the first quarter last year. Those increases in these ratios are due to the reversal of provision for credit loss expense described above. However, excluding the reversal of provision and the MSR recovery, our core ROA was still very robust at 1.83% for the quarter. As Palmer mentioned, tangible book value has remained a focus of ours. It increased by $1.58 or 6.7% for the quarter from $23.69 to $25.27. For the year-over-the-year, we increased that by $4.83 or 23.6% from the $20.44 that it was this time last year. In addition, our tangible common equity ratio increased 15 basis points to 8.62 from 8.47 at the end of the year. The PPP loans and approximately $2 billion of excess liquidity on our balance sheet negatively impacted this ratio by 129 basis points. So, excluding the PPP loans and the excess cash from total assets, our TCE ratio would have been approximately 9.9 at quarter-end, which is well above our stated target of 9%. Having said that, you can see that we continue to be well capitalized and we feel comfortable with our capital and our dividend levels. Moving on to margin. As expected, our net interest margin declined by 7 basis points from 3.64% to 3.57% during the quarter. Our yield on earning assets declined by 13 basis points while our total funding costs decreased by 6 basis points. But our total interest-bearing deposit costs decreased by 9 basis points. The approximate $2 billion of excess liquidity on our balance sheet negatively affected our margin by 24 basis points. Those 24 basis points were offset by the increase in yield on loans, both held for sale and investment, including PPP accretion for that net decline of 13 basis points that I previously mentioned. We continue to stay focused on our deposit costs, but the real drivers for improving margins going forward is putting that excess liquidity to work, which we anticipate occurring over the next three quarters. We've already mentioned that we reversed the $28.6 million of provision expense for the quarter due to improving the economy, particularly our economic forecasts related to unemployment and GDP and the CRE Index. We continue to carry qualitative factors on various segments of our portfolio to include commercial real estate, mortgages, and hotels. Our ending allowance for loan loss was $178.6 million compared to $199.4 million at the end of the year and $149.5 million at the end of the first quarter last year when the pandemic had just begun. Including the unfunded commitment reserve and allowance for other credit losses, our total allowance for credit losses was $200.2 million at quarter-end compared to $233.1 million at the end of the year and $167.3 million at March of last year. Non-interest income remained strong this quarter due to the continued elevated production in the mortgage division. Taking out the MSR noise of an impairment in prior quarters and the recovery this quarter, and the non-recurring gain on BOLI that's also not in non-interest income, if you take out all that noise, non-interest income increased 39% from the first quarter last year to the first quarter this year. Mortgage production was right at $2.6 billion for the quarter compared to $2.8 billion last quarter, and the gain on sale decreased to 3.95% compared to 4.34% last quarter. The open pipeline at the end of the quarter was 16% higher than at the end of the year, finishing at $2.3 billion compared to an even $2 billion at year-end. While we do see production slowing later in the year, to quote Palmer from last quarter, we really don't foresee a cliff dive there, but we do continue to monitor it. Moving on to expenses, total non-interest expense continued to decline this quarter from $151 million last quarter to $148.8 million this quarter. Last quarter, I guided that we would continue to prudently examine non-interest expense and anticipated minimal increases in the core bank. So, I was really pleased with our efforts here this quarter and our determination to find ways to fund new initiatives. As a result, expenses in the banking division declined by $2.3 million during the quarter, and our efficiency ratio in that division improved by over 200 basis points. We continue to watch the efficiency ratio by division very closely. Overall, for the company, our adjusted efficiency ratio increased this quarter to 54.62 from 52.67 last quarter, but declined from the 59.87 reported this time last year. I previously guided for the efficiency ratio to stabilize in the 53% to 55% range because we really don't anticipate the previous level of mortgage revenue and efficiency to be sustainable. So, we came in right in line with that guidance. However, we do continue to monitor the variable costs in the mortgage division. And we anticipate those reducing down as production declines in the second half of the year. On the balance sheet side, we ended the quarter with assets of $21.4 billion compared to $20.4 billion at year-end. We were pleased with our organic loan growth of $118.9 million or 3.3% annualized for the quarter. As you can see on slide 14 in our slide deck, we had about $294 million of headwind against significant growth in CRE, residential, and our new C&I division. We believe the decline in C&D and warehouse lines could be cyclical, and we could see further growth over the remainder of the year, although we are watching those warehouse lines to determine if that's truly cyclical or if it's the beginning of a trend. We already discussed the excess liquidity that you can see in the other earning assets on the balance sheet due to the tremendous deposit growth this quarter. We grew deposits $918 million or 22% annualized. Over 71% of that deposit growth was in non-interest-bearing deposits. While we did have the expected seasonal runoff, we also had approximately $900 million in extra PPP funds and stimulus money come in. Now the real question is, how fast can we put that liquidity to work? We continue to anticipate net loan growth net of PPP activity for the year in the mid-single digits, kind of that 5% to 7% range, which is about $1 billion of growth. So that $2 billion of excess liquidity, we've got $1 billion going into loans. That leaves about $1 billion of excess cash to prepare for any deposit runoff that we might see from that PPP funds being deployed or the stimulus money being used, and also as we begin to buy investments as rates become more appealing. So, to wrap up, we're excited about the remainder of 2021. We're in some of the best markets in the southeast. Life is getting back to normal and businesses are starting to grow. We're protecting our margin as much as possible and we're ready to utilize this excess liquidity to fund loan growth. Mortgage and fee income remain strong, and expense control is as always part of our company DNA. I appreciate everyone's time today. And with that, I'll turn the call back over to Andrea to open up the Q&A session. Thank you, Andrea.

Operator, Operator

Our first question will come from Casey Whitman of Piper Sandler.

Casey Whitman, Analyst

Nicole, thanks for that loan growth guide you just gave. With regards to that, I think you guys may have sold off some more of the consumer loans this quarter. Can you tell us how much that was? And should we expect you to maybe continue to sell some of that off, I guess, on top of the auto runoff? And I'm assuming that that is part of the 5% to 7% growth expectation you just gave?

Nicole Stokes, CFO

Correct. It is included in that. So, the only portfolio that we sold this quarter, we had already moved to held for sale in the fourth quarter of last year. So, it did not come out of the held for investment this quarter. And we do not anticipate any other loan sale. So, that was the same loan sale that we talked about last quarter transferring into held for sale, and then it went out of held for sale this quarter.

Casey Whitman, Analyst

So, really, it's just the indirect auto runoff still happening.

Nicole Stokes, CFO

That's right. And that has slowed. Our indirect runoff, if you think back closer to July of 2019 when we first acquired Fidelity, that was running off at about $139 million to $140 million a quarter. That had slowed to about $100 million a quarter and our portfolio there is down to less than $500 million. So, we do have that headwind slowing, and we are eventually going to get down to just that little tail end of it.

Casey Whitman, Analyst

Makes sense. And then maybe just kind of a housekeeping question on PPP for you guys. The new $350 million or so in 2021 originations in the latest round, do you have the associated fees with the new originations?

Nicole Stokes, CFO

On the PPP round 3, we have $17 million of deferred fee, $17.4 million of deferred fees on round 3. And then, on round 1 and 2, which are both of the 2020 rounds, some people call it 1A and 1B, we have about $8.5 million left there. So total deferred fees are just about $25 million to $26 million.

Casey Whitman, Analyst

Next question comes from Brady Gailey of KBW.

Brady Gailey, Analyst

Mortgage still remains very robust for y'all, which is great to see. And I keep thinking it's got to slow down at some point. But, yeah, it still feels like it's pretty robust. Any color just on what you're seeing within mortgage today? And any sort of idea of when you think mortgage could start to normalize lower?

Palmer Proctor Jr., CEO

It's Palmer. I will tell you that, as we've said all along, and Nicole mentioned her comment, with the way our mortgage shop is set up, there was never going to be a cliff dive, which I think, based on Mortgage Bankers Association numbers, you would expect that we didn't see that nor did the industry see that. I can tell you that in the second quarter, in terms of our pipeline, now we've had a strong April. And things look positive there. The second half of the year is hard to predict at this point. But I think mortgage will continue to deliver into the second half. But one of the things we're probably most encouraged with as of recent, if you look at our current production, 74% now of our production was purchase business, which is really encouraging. We had so much refinance business, all of us had as an industry. So, it's nice to see that purchase coming back. And with the demand for housing and especially in all the growth markets we're in, I think the housing sector will continue to deliver for banks through the remainder of the year, albeit at a tempered pace as we move into the second half of 2021.

Brady Gailey, Analyst

The next I just wanted to ask about the continued opportunity to take market share. We saw State sell to Cadence, now Cadence has sold to BancorpSouth. You even saw, it's much smaller deal that SouthCrest sold to Colony last night. There just continues to be a lot of dislocation, especially in the Atlanta market. Can you just talk about the opportunity to continue to hire away and steal market share versus the opportunity to do something more transformational via some sort of M&A transaction?

Palmer Proctor Jr., CEO

I think when people think of transformational, they think of immediately a larger transaction. I think a transformational change can take place over time. And I think that's a more sustainable transformation. And that's kind of how we look at things. But first and foremost, we focus on our organic growth internally and our ability to generate that growth, which I think we have delivered to the market. I think what happens is when you have disruption, like we're seeing throughout the market, that's music to our ears in terms of opportunity. We now have people positioned in place. I couldn't be more excited about the potential we have for commercial growth too, which we have been talking about and made some significant investment in. That's beginning to deliver for us. I think we'll see that accelerate as we get into the second half of the year, primarily due to two things. Number one is the disruption that you mentioned. Number two is the improving economy. You put those things together across our footprint and it's pretty meaningful. And then, on top of that, if you layer in opportunities, M&A opportunities, I think that can further supplement our efforts there. But disruption is good for us, primarily because we're positioned well to take advantage of it. We'll continue to do that, both in the form of organic growth and certainly exploring M&A opportunities ourselves.

Brady Gailey, Analyst

And then finally, for me, maybe just for Nicole, you mentioned that you have $2 billion of excess liquidity. Half of that will hopefully go into the loan book. That leaves you another billion to maybe put in the bond book. I know bond rates are up some, but they're still pretty low. What are your thoughts on kind of when you pull the trigger to deploy that cash into the bond book? Is it now or do you wait for rates to go up a little more?

Nicole Stokes, CFO

Brady, we would like to wait a little bit longer. We would like rates to go up a little bit more. Here's my logic there. While we do have $1 billion, the $2 billion minus $1 billion of loan growth and we've got about $1 billion left of what we're going to do with that. We do anticipate some deposit runoff as things start to get back to normal, as people start using that money. So, we anticipate some of that and we are starting to look at some purchases and some other investments. The piece that we're holding back on is, right now, with the yields that you can get at that duration, when rates do go up, we feel like we would be sitting in an unrealized loss position on those purchases. That's going to come through OCI and that's going to be a negative to tangible book value, eventually. For the little incremental that we could get today on a bond purchase versus that longer-term outlook on the effect that it could have on tangible book, we've said repeatedly that we're focused on tangible book value growth. I don't want to make a short-term decision today for a very small increase in my margin. If there are other things that we can do, we've continued to grow net interest income, NII dollars. We feel like, as well, with the mortgage portfolio, as we continue to have that and have those mortgage loans held for sale, you'll see that bubbled up a little bit more this quarter. We did that on purpose to kind of let that grow a little bit because we can get a much better yield there than what we could get in the bond portfolio. So, as rates come down and we start, maybe the mortgage loans will start to sell down at that same time rates are going up. The short answer is that we probably need another 25 to 50 basis points from what we could get today would be our preferred, but we may start buying a little bit ahead of that.

Operator, Operator

Next question comes from Jennifer Demba of Truist.

Jennifer Demba, Analyst

Could you give us an update on your C&I lending efforts, Palmer, and how that's going versus your internal budget and what opportunities you see in the future, if there are more hiring opportunities or you're happy with the team you have now?

Palmer Proctor Jr., CEO

Jennifer, I'm sorry, I missed the first part of your question. It was kind of muffled. Can you repeat it for me, please?

Jennifer Demba, Analyst

Sure. I'm sorry. Could you give us an update on your C&I lending progress today and how that has panned out versus plan? And if you plan on making any more hires in that area?

Palmer Proctor Jr., CEO

When you look at C&I, as I mentioned, that's probably where I'm really encouraged. Our pipeline right now is at an all-time high as we sit here today, and I know loan growth is key to everybody's future success going forward. I’m pleased to say that we are at an all-time high on our pipeline. We are certainly seeing a lot of activity in several different sectors. In terms of hiring, we did hire another three C&I lenders this quarter and those continue to be opportunistic for us throughout the footprint. We've got a couple of opportunities in Atlanta now, and then we also have another hire down in the Jacksonville market, and two in the Carolinas this past quarter. We feel good about that and the momentum that we're building there. Keep in mind that it's a slower growth model with the C&I initiative, but it's more meaningful in terms of relationships versus transactions. At the same time, we have a robust pipeline of CRE initiatives as well.

Operator, Operator

Next question comes from Brody Preston of Stephens.

Brody Preston, Analyst

Nicole, just a quick question, do you have the average PPP loan balances by any chance?

Nicole Stokes, CFO

I do. Our average balances for round 1 and 2 for the first quarter were $618.6 million. And when I say 1 and 2, that's kind of the 2020 1A, 1B. And then PPP round 3 was $146 million on average. So, our total average was $765 million.

Brody Preston, Analyst

I wanted to ask then, so when I back that out, right, you get to, like, call it a 4.35% core loan yield when you back out PPP. And so, I wanted to ask, like, where do you see that core loan yield kind of trending as we head forward for the rest of the year, just given that dynamic?

Palmer Proctor Jr., CEO

There are a couple of things there. Our loan production yield — our new production did kind of come down this quarter. But a lot of that, when you think about it, is because of the pipeline. The pipeline that was already there funded in the first quarter. So, what we're seeing now is more stable, and maybe even a little bump up. We're starting to see some competitive pressure on those yields coming in. We've had a couple of players that have been out and they're starting to come back in. So, we're starting to see some competitive pressure that’s offsetting where we really think some of the yields would have — those production yields would have gone up. So, on the loan portfolio, taking out the PPP, we could anticipate potentially 3 to 5 basis points of compression. We also feel like we have 2 to 4 basis points of additional deposit cost savings, so those almost offset.

Brody Preston, Analyst

I guess ex PPP, you're looking for the core margin to be flat to down slightly from here.

Palmer Proctor Jr., CEO

That's right. Ex PPP, probably one more quarter at least of some compression. With PPP, we're saying kind of that same 5 to 7 basis points, mid to high single digits. I'll say there are two wildcards there, really, Brody. One is that use of excess liquidity and how quickly loan growth comes in the second quarter. And then the other wildcard is PPP and how quickly that pays off.

Brody Preston, Analyst

Just on the growth that you have this quarter, commercial growth when you kind of add up the commercial categories, ex the business lines, was solid. But the bulk of that was obviously carried by CRE. And when I look at the breakdown, it's office, it's retail, and particularly office specifically grew by about 20% in the linked quarter. And so, I just wanted to ask where is this growth sort of coming from from a geographic perspective? And sort of what gives you comfort originating these loans, just given all the work from home fears? And then, if you could provide some detail as to what the office exposure looks like? Is it like single tenant lawyers or is it bigger office buildings, just give us a sense there.

Jon Edwards, Chief Credit Officer

Okay, that's fine. So, the geographic dispersion is still very good. And if you think through some of the hires that we have been able to bring in over the last year in Tampa and Jacksonville and Charlotte and beyond, we've been able to get new business in those marketplaces. So, it's been a well-diversified market. The types of loans have been from really medical office buildings to larger offices, really. We've tried to stick to essential businesses, suburban mid-rises. There's occasionally an okay product. But if we can stick to a long-term lease with a group of businesses that have been there for quite a while and have an essential function in that market, then we feel better about it. And that's kind of how we've tried to stick to the underwriting on those.

Brody Preston, Analyst

Could you provide some thoughts around the growth outlook for some of your business line portfolios, particularly Premium Finance?

Palmer Proctor Jr., CEO

I think Premium Finance, what you'll find is, it's been very consistent. I think it will continue to be a steady provider for us. So, that asset class, we feel very comfortable with in terms of our ability to continue to generate sustainable revenue there. The one that often won't reflect a lot of growth, but reflects a lot of productivity is the residential construction lending group. Because, as you well know, our inventory has been so low and how quickly things are turning, there's been tremendous income generated out of that division, but the growth won't be there. That's a sign of just an overly healthy housing market. We continue to see that as a real plus. Nicole mentioned the flexibility we've got with the mortgage portfolio and the held for sale and our ability to utilize that to our advantage. The C&I growth will continue. As I mentioned, that's where a lot of our focus is. It does take longer, but we're encouraged by what we're seeing. A lot of that is due to some of the new hires we brought onboard over the last 12 months. We're fortunate to be in all of our growth markets for the most part. The CRE that Jon touched on will still be a very viable product for us as well. SBA is one that we want to ramp up. I think there are going to be some additional very meaningful programs coming out of the SBA, and we want to make sure we get our fair share of that. We've not had the growth there that we would have liked, but I think you'll see a continued focus on that, which ought to be meaningful as we go forward in terms of generating some good non-interest income. I think that pretty much breaks down all of our asset classes.

Brody Preston, Analyst

Nicole, what was the dollar amount of the seasonal increases for expenses for both the core bank and the business lines? And does that come out of the run rate in the second quarter?

Nicole Stokes, CFO

What we had in the mortgage, we had about $1.3 million of payroll taxes that hit in the first quarter that will taper off as the year goes by. And then in the core bank, we had about $1.8 million to $2 million of those payroll taxes.

Brody Preston, Analyst

I just have one last one. I appreciate you taking all my questions. Palmer, just want to follow-up on the M&A. So, the bigger deals that we've seen, the buyers have lagged and I think the MOE types with higher execution risk. So, I just wanted to ask you, have your thoughts changed as you're seeing all these deals kind of hit the tape? Are you thinking along the same lines that maybe a smaller $2.5 billion, $3 billion, or $4 billion kind of deal bolt-on that would enhance Ameris a little bit? Could you just provide some thoughts on the type of bank that you'd be looking to acquire in the current environment?

Palmer Proctor Jr., CEO

I think we've been pretty consistent on this. We've kind of said our sweet spot is really between $3 billion and $10 billion. Having said that, regardless of whether it's a $10 billion bank or a $3 billion bank, we're not going to do anything that would take on excessive execution risk, nor anything that wouldn't be accretive to our organization. We are very strategic in the way we look at M&A. As I've said before, it helps us garner additional market share in some meaningful markets or if we need it or if it provides and helps further a line of business that we're interested in growing, those are certainly some opportunities for banks that are within that space. There are probably some other non-bank opportunities that may be out there as well. We're going to remain consistent in our approach there in terms of making sure whatever we do is strategic and fits into our overall plan. I do think there will be some meaningful opportunities out there, but it's going to have to be the right one. It's going to need to be a cultural fit, and it's going to need to be able to further our strategic initiatives.

Operator, Operator

Our next question comes from David Feaster of Raymond James.

David Feaster, Analyst

I just wanted to start on loan production and kind of what you're seeing there. Obviously, it's a bit slower than we had in the fourth quarter. Still trending below pre-pandemic levels, but it's extremely encouraging to hear about the pipeline, especially the C&I pipeline. I'm just curious how much of the slower production was a distraction from PPP and just whether you'd expect that to reaccelerate back north of fourth quarter levels or even closer to pre-pandemic levels, kind of north of $900 million.

Jon Edwards, Chief Credit Officer

I think the opportunity is for all banks out there right now. The first quarter is typically seasonally a slower quarter to begin with. We need to be mindful of that. When you parlay that with the whole issue with the pandemic and PPP, I would like to say that we were 100% strength of our PPP, that is not the case. We had several people that were obviously wearing two hats and helped them out with PPP in addition to their day jobs and everybody pitched in to get that done. That being said, what we've been able to do is kind of take advantage of this pandemic time to bring in new talent and to build up the commercial opportunities. We've been out actively calling more than a lot of people focused inwardly. We were out calling. What we're starting to see is those pipelines that have been built, that doesn’t happen overnight. It takes about 60 to 90 days to kind of get things going, and we're now in that 60 to 90-day period. So, that's the benefit and lift we’re seeing in the pipeline. You compound that with what we hope will be an improvement in the economy between now and the end of the year. I think you'll see accelerated growth as we get into the second half of 2021. We'll probably preempt that a little bit in the second quarter, just given our current pipeline. We're probably about a quarter ahead of most banks.

David Feaster, Analyst

I guess just where are we at in the migration of the new PPP clients? Where are we at in bringing those over? How much of your pipeline do you think is from new clients coming over versus improved sentiment and improved demand from existing clients being ready to invest?

Palmer Proctor Jr., CEO

Like most banks, we did a lot of outreach during round 3. The majority of most banks' production, ours included, remains about 80% with existing customers. The other 20% was new customers, and they are meaningful customers. They're all meaningful. Any customer is. I think in terms of moving the needle, I have not witnessed the huge lifts that I've heard others talk about. I don't know if I've seen it, and if others have either, in terms of a huge migration of new customers as a result of PPP. We certainly have garnered new customers and value those customers, but it has not been — I wouldn't hang our hat on the growth coming from that, that 20%. What we're doing is taking care of the PPP customers, embracing the new ones, but more importantly, going out and hunting for new customers. I think that's the opportunity that exists for our bank right now with all the disruption in our markets. We remain focused, as we've always been, on maintaining and retaining existing customers, but more importantly, going out and trying to identify new opportunities.

David Feaster, Analyst

Just curious, I wanted to touch on asset quality. Could you give us some detail on what drove that increase in criticized balances and just how you think about the reserve going forward? Would you expect to maintain the reserve ratio here, excluding PPP? Or do you see opportunities for maybe some additional reserve releases?

Jon Edwards, Chief Credit Officer

Let me take that in reverse. The reserve is being built off of the forecast models. As those continue to improve and businesses get back to work, I think we certainly are under pressure for release. We really don't want to do that, so we are looking at opportunities within the CECL framework to hold on to the reserves, but forecast models generally kind of drive the day on a lot of that. The criticized increase in the first quarter was really just two relationships, both of which were really single loans. One was an assisted living facility, one was a hotel, and they were both still impacted by COVID restrictions. There's not anything that was systemic by any stretch; it was just extraordinary to those two properties. Most all of the deferrals we did on hotels were through the middle of this year, which is coming up on us very quickly. As we approach that and finalize what these customers are going to be able to do going forward, I believe we'll see some opportunities for improvement in the watch list, primarily because we had so many hotels that comprise the watch list. We're at that point where we did the final deferrals on those, so we'll be watching that very closely this next quarter.

Operator, Operator

The next question comes from Christopher Marinac of FIG Partners.

Christopher Marinac, Analyst

Just wanted to follow-up on the mortgage gain on sale this quarter. Going forward, do some of the expense initiatives in the mortgage business and efficiencies you're building into that help the gain on sale far less than it otherwise would?

Nicole Stokes, CFO

No, not necessarily. But that's a great question as you think through that. The gain on sale did decline from 4.34% to 3.95%, about a 39 basis point decline. I don't anticipate another 39 basis point decline by any means. But one thing I want to add is our production was actually very stable. Even though production was stable and units were stable, you saw the expenses remain pretty stable, even absorbing the cyclical first quarter payroll taxes, but that's really based on production. When the gain on sale went down, our revenue went down, but our expenses stayed the same. So seeing that gain on sale move back up will certainly help that or stabilize or move up. When production starts falling down, you’ll see the shift in costs.

Palmer Proctor Jr., CEO

Chris, if you look at last year's production, about 84% of last year's production was variable expense. The key, as Nicole touched on, is being able to move quickly with that, and we've got a disciplined culture across the board and especially in mortgage. As we see that tapering back, you'll see the expenses adjust accordingly. People always tell me how scalable that business is, but the reality is how quickly can you move and should you move. It'd be prudent not to be hasty in what you're doing. I think we've got a good handle on that. As we see the production pullback, you'll see the expenses move accordingly.

Christopher Marinac, Analyst

Just to follow-up on the outreach from your customers that you talked about, Palmer, to what extent are you seeing the account openings that you want in wealth management and new commercial business? It sounds like it's moving in the right direction. Just want to get a little more background there.

Palmer Proctor Jr., CEO

It is. There's a void in our market with that type of wealth initiative. I see that as a big opportunity for our bank going forward. In my opinion, it can't grow fast enough. I look at the client base that we have grown; our team has done a wonderful job of doing that. We're starting to see the benefits in terms of earnings and contribution. You know the contribution it can make, and we've got to double down on our efforts there in terms of growing those assets under management. Right now, I think the market, due to all the disruption and the scarcity of these wealth groups within banks, there are a lot of RIs outside of banks, and those may present opportunities for banks as we go forward. That's certainly an area of focus for us as we can afford it, and I'd like to see more growth out of it.

Operator, Operator

The next question is a follow-up from Brody Preston of Stephens.

Christopher Marinac, Analyst

Sorry to hop back on. I'm just getting questions inbound from some folks. I wanted to ask, if you back out the MSR write-up on mortgage each quarter, it was actually lower this quarter. I wanted to ask if that was due to lower hedge income on the locked pipeline?

Nicole Stokes, CFO

When you say it's lower, do you mean revenues?

Christopher Marinac, Analyst

Yeah.

Nicole Stokes, CFO

It's actually that gain on sale dropping those 39 basis points because our production was fairly stable. Production last quarter was about $2.8 billion. Production this quarter was almost $2.65 billion. Production was fairly stable, but with that decline in the gain on sale, our net revenue went down.

Christopher Marinac, Analyst

The last one is just the PPNR of the banking division. I think you guys have been bouncing around in the mid-40s, up to 60s and now we're back down to $47 million for the core PPNR of the banking division. What are going to be some of the levers that you pull to move that PPNR higher? Because it's going to become more important as mortgage kind of normalizes in the back half of the year and into 2022.

Nicole Stokes, CFO

Absolutely. So, that's really where you see some of the initiatives that we've talked about with the occupancy expense as far as leases. We've got some of it there. We've also got some efficiencies moving forward, just evaluating everything that we do and how we do things. After you do a big acquisition like Fidelity, you kind of have your cost savings built out, get through conversion, then you really start looking at everything. One other aspect in that banking division is our treasury. We've done a really good job. We've got some efficiencies going on in treasury, as well as some initiatives there to increase some treasury income. That has helped as well. We've also got a huge technology benefit. Looking at our top technology costs, about 25% of that is forward, what we think about as future benefit—what we think about has future benefit as far as integration, automation, and delivery platform. About another 20%, roughly, of our IT includes project management office. About another 20% of that is related to efficiency projects. This is really all of that coming to fruition and gaining synergies through those areas.

Operator, Operator

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

Palmer Proctor Jr., CEO

Great. Thank you, Andrea. Again, I want to thank everybody for listening to our first quarter 2021 earnings results. I did want to close by emphasizing how energized we are over here at Ameris about our future. We are clearly in some of the best markets in the Southeast. More importantly, we have the right bankers in those markets to take advantage and capture some additional market share where we are. We've positioned ourselves well for the future, remain focused on producing top quartile results and strong asset quality, and continuing to focus on efficiencies. We'll garner many of those through our technology initiatives. We're really looking forward to the rest of 2021 and beyond. Thank you again for listening in today.

Operator, Operator

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