Earnings Call Transcript - ABCB Q2 2020

Operator, Operator

Good morning. And welcome to the Ameris Bancorp Second Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s 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, Kate, and thank you to all who’ve 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 will discuss the details of our financial results before we open up for Q&A. I think I am pleased to mention here that we are practicing social distancing, although we are in the same room, with social distancing for sure. Before we begin, I’ll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also, during the call, we will discuss certain non-GAAP financial measures in reference to the Company’s performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I’ll turn it over to Palmer for opening comments.

Palmer Proctor, CEO

Thank you, Nicole, and thank you to everyone who’s joined our call today. I'm excited to share with you our second quarter results as we successfully navigate in this new environment. Nicole is going to update you on the detailed financial results in a few minutes, but I wanted to hit just a few of the highlights. For the second quarter, we've reported net income of $32.2 million or $0.47 per diluted share, which is inclusive of an $88 million provision for loan loss expense. We're pleased with our operating ratios as they moved in a positive direction this quarter. Our net interest margin improved by 13 basis points to 3.83% as we lowered interest bearing deposit costs by 43 basis points during the quarter. We also saw significant improvement in our adjusted efficiency ratio, which improved to 51.08%, most of that was due to the efficiencies we've garnered in our mortgage division during the quarter. We continue to identify additional cost savings as a way for us to self-fund future technology and innovation costs. We’ll discuss some of these initiatives later on in the discussion today. On the loan front, we exhibited cautious but solid growth in the second quarter. We extended over $1 billion in PPP loans to about 8,200 customers and originated a record $2.9 billion in single-family mortgages. Excluding PPP loans, organic loan growth was just over $384 million. We also saw significant growth in deposit accounts. Noninterest-bearing deposits now account for over 35% of total deposits. Next, I want to give you an update on business in this new environment. We've adapted to have another 75% of our staff working remotely, and our lobbies remain closed except for appointments. We do continue to successfully serve our customers through digital channels and through our drive-through capabilities. In fact, we're still opening more new DDA accounts in the current environment than we did in prior quarters despite our lobbies being closed, and we continue to see an increase in the number of mobile banking customers. We view this as a real opportunity going forward. While our customers are also learning the new norm in this COVID-19 world, they are persevering. As I previously mentioned, we continue to see loan demand, and to date we have experienced marginal impact on our credit quality ratios. On our last earnings call, we said we have provided payment relief to almost 5,400 customers totaling $2.2 billion in outstanding loans across all loan types and markets, which equated to about 17% of total loans. Those were the first of the 90-day modifications. The speed and level of requests have slowed down through July 15. We have provided payment relief to customers totaling $2.8 billion with outstanding loans. Thus far, customers requesting the additional 90-day extension totaled just over $290 million, with a high concentration of that being our hotel borrowers. But what is encouraging to see is that customers reverting back to the pre-COVID terms of their agreements now exceed $1 billion through July 15. As it pertains to capital, we remain highly focused on capital preservation and growing tangible book value. And as for dividends, we're very comfortable with where we are with our dividends today and do not anticipate any reduction at this time, but obviously we continue to monitor this as an option. And finally, as you're aware, our stock buyback program remains suspended. John Edwards, our Chief Credit Officer, is with us today, and he's available for questions after our remarks, but I wanted to hit a few highlights in terms of credit. As previously mentioned, we recorded an $88 million provision for loan loss expense in the second quarter, primarily due to the updated economic forecast. As you can see on Slide 17 of our investor deck, this brings our allowance coverage, including unfunded commitments to 1.52%, net of the PPP loans. Our annualized net charge-off ratio was 27 basis points of total loans. Our non-performing assets as a percentage of total assets decreased slightly to 59 basis points compared to 61 basis points in the prior quarter. We have no direct exposure, as we've stated before, to the oil and gas sector, and we have included additional details in our hotel and restaurant exposure in the slide deck as well as details on the diversification across loan types within our loan portfolio. We've started to get some questions regarding M&A and whether we're ready to get back into the game, and I’ll tell you that with the uncertainty of COVID and the general economy, we're watching the market closely and we will wait for the right opportunity, but we will be ready when that day comes. And I'll stop there now and turn it over to Nicole for some further updates on the financials.

Nicole Stokes, CFO

Great. Thank you, Palmer. For the second quarter, we've reported net income of $32.2 million or $0.47 per diluted share. As Palmer mentioned, this includes $88 million of provision for loan loss expense, primarily related to the update of our economic forecasts and not related to any specific credits within our portfolio. On an adjusted basis, we earned $42.4 million or $0.61 per share, when you exclude the merger restructuring charges, servicing asset impairment, COVID-19 expenses, legal fees from the ongoing SEC investigation, and the loss on the sale of bank premises. Our adjusted return on assets in the second quarter was 89, which was a slight increase from the 87 reported last quarter, and our adjusted return on tangible common equity was 11.66% compared to 10.98%. Both of these ratios are less than historical levels due to the increased provision for loan loss expense. Tangible book value increased by $0.46 from 20.44 to 20.90 during the quarter. Our tangible common equity ratio decreased by 55 basis points to 7.70 from 8.25 from the end of last quarter; however, the asset growth from PPP loans negatively impacted that by 45 basis points. So, excluding the PPP loans from total assets, our TCE ratio would have been 8.15 at June 30. We were extremely pleased with our positive rebound in the margin this quarter. Our net interest margin improved by 13 basis points from 3.70 to 3.83 during the quarter, as we were successful and quickly reducing funding costs. During the quarter, our yield on earning assets declined by 25 basis points, but our funding costs decreased by 49 basis points, and our total interest-bearing deposit costs decreased by 43 basis points, as we continue to stay focused on our pricing, and we really didn't see the competitive delay with the March Fed cuts that we've seen in the past. We saw an increase in accretive income compared to last quarter because of some payoffs in the Fidelity portfolio that we don't anticipate to recur in future quarters. Our core bank production yields declined to 4.16 for the quarter against 4.55 last quarter. And on the deposit side, we continued the momentum on non-interest-bearing deposits and improved our mix such that non-interest-bearing now represents 35.89% of our total deposits compared to 30.3% at the end of last quarter and 28.9% this time last year. A large portion of the increase is related to PPP deposits, and we anticipate this gradually running off and have modeled that in our outlook modeling. As I previously mentioned, our second quarter provision expense was $88 million, approximately $68 million of that was related to loan loss, and $20 million was an increase for unfunded commitments. We had approximately $9.2 million of our net charge-offs for the quarter. Our ending allowance for loan loss on June 30th was $208.8 million compared to $149 at the end of last quarter and $38 million at the end of the year. If you add in the unfunded commitments reserve, our total allowance for credit losses was $240.6 million at the end of the quarter compared to $167 at the end of the first quarter and $39 million at the end of last year. Moving on, our close and non-interest income was exceptional during the second quarter. Our mortgage group had record production efficiency and earnings due to the interest rate environment. Mortgage production hit record levels at just over $2.6 billion for the quarter, and the gain on sale increased to over 3.5%, up from 2.88% last quarter. Net income in the retail mortgage division increased to $53.5 million for the quarter. Total non-interest expenses were $155.8 million for the quarter; however, when you remove the COVID-19 expenses, the merger restructure, the attorney fees from the SEC investigation, and the loss on federal branches, our adjusted non-interest expense totaled $149 million, that was up $14.7 million from last quarter. However, expenses in the retail mortgage segment increased by $20.8 million due to the variable costs associated with the increased volume such as commissions. So as you can see on Slide 11, all of the increase in expenses are related to the lines of business and are more than offset by increased revenue. And as we expected and as we discussed on this call last quarter, excluding the lines of business, our expenses in the core bank and administrative functions decreased by $7.4 million during the quarter. This led us to be extremely pleased with our efficiency ratio. Our adjusted efficiency ratio improved to 51.08 compared to 59.87 last quarter. The increase in mortgage revenue and the efficiency gain in the mortgage division significantly impacted this ratio, and we do believe the ratio will increase slightly in future quarters, as we don't anticipate this level of mortgage revenue and efficiency to be sustainable. As Palmer mentioned, we've identified several areas for additional cost savings, and we've identified nine branches that will be closing in the third quarter. We've identified several branches that will remain as drive-through only after the pandemic ends, and we're also having an initiative to reduce our lease expense on non-retail banking offices that we can eliminate or consolidate into other facilities. This is all in addition to the 14 branches that we've already closed from the Fidelity acquisition. We've already terminated or negotiated out of 11 lease spaces for an annual cost savings of over $1.5 million going forward, and we continue to look for more opportunities. We've initiated an employee incentive program to share in the cost savings to really drive the cost savings culture with our new employees. We view these cost savings as a way for us to pay for the growth in technology and innovation going forward, while we can maintain our efficiency ratio in the mid to low-50s. On the balance sheet side, we were pleased with organic growth both on the loan and deposit side. Loan growth this quarter was $1.4 billion, including the $1.1 billion of PPP loans. So, excluding those loans, our organic loan growth was about $384 million, that's just over 11% annualized. However, approximately half of that loan growth was seasonal growth in our warehouse and ag line, which we anticipate will normalize later in the year and bring our loan growth back in line with our estimates of about 7% for the year. More details of our loan production can be found on Slide 21 and 22 in the investor presentation. Our total deposits increased by $1.7 billion during the quarter, of which $1.4 billion was non-interest bearing and was positively impacted by PPP deposits as we discussed earlier. Our loan-to-deposit ratio ended at 93% compared to 94.6% at the end of the first quarter. As Palmer mentioned, we continue to be well-capitalized, we feel comfortable with our capital level, and our liquidity position remains strong. And with that, I'll turn it over to Palmer for closing comments and the Q&A.

Palmer Proctor, CEO

Thank you, Nicole. I'd like to thank everyone again for listening to our second quarter results. In closing, I share the view that we are obviously moving into the second half of 2020. We are coming up with a marketing strategy and campaign, a back to business together, and I think that's fitting for our company as well as our customers and our communities. While we think the COVID-19 pandemic is going to last longer than we had all anticipated, we're adapting and we continue to be business-oriented as we get back to business together. I remain very optimistic about the future, even in these uncertain times, and that's primarily from just knowing the ability of our team and the power of our core operation. We will continue to remain diligent, well-positioned and focused on the future. And with that, I'll turn it back over to Kate for any questions from the group.

Operator, Operator

We will now begin the question-and-answer session. Our first question is from David Feaster from Raymond James.

David Feaster, Analyst

I appreciate the commentary on re-deferral rates, and the early read is good. I guess if I look at it, it's kind of a low 20% re-deferral rate if I'm doing that math correctly. How do you think about re-deferrals going forward? I mean, did you adjust any risk ratings for the re-deferral loans, and did you require any additional collateral or personal guarantees, just any thoughts on those trends going forward?

Palmer Proctor, CEO

On the re-deferrals, we looked at each of them individually. And as they were in the hotel sector primarily, we pretty well knew because we've stayed in touch with our folks very closely. We pretty well knew that was coming. So, it wasn't a surprise. We didn't go out and get into additional hotels, and the personal guarantees are pretty well on there. That really, I think is more of a function, and you know this, that hotels just haven't come back yet. And even though Disney and Universal are open in Orlando, it's not impacted the hotels yet. So, they just needed more time to get back on the right footing. And so, that's what the second round is really designed to do.

David Feaster, Analyst

And then I guess taking that into account, how do you think about reserve build going forward? It seems like most of the heavy lifting has largely been done. But as you can continue to see re-deferrals and maybe some risk rating downgrade and some modest credit migration, would you expect to see additional reserve builds in the back half of the year?

Palmer Proctor, CEO

I think what you said is absolutely the right thing, I think the heavy lifting has been done, and what you see from here are going to be more on the individual side. So, it'll be one-offs that can't get back on their feet. Timely, it'll be the TDR that we'll have to do going forward and so on and so forth. But from the economics and the forecast modeling that we have in our CECL model, I think what you said is absolutely the right thing, the heavy lifting has been done.

David Feaster, Analyst

And then just any thoughts on origination activity going forward. Obviously, the PPP program was a major distraction in the quarter, but just curious your appetite for originations and the pulse of the market. I mean, how much of the decline in originations were strategic? Were you tightening the credit box versus limited demand, and where are you seeing demand and just any thoughts on Florida, too. Obviously, investor concern is really spiked given the increase in cadence here, but your footprint is pretty good compared to where the increase is in South Florida. Just curious any thoughts on loan growth origination activity and appetite for credit in your markets?

Palmer Proctor, CEO

Dave, this is Palmer here. Yes, good question. Right now, again we kind of break it down by individual line of business and obviously by the demographics of different states. But I will tell you that there is still -- as I mentioned before, there's still solid loan demand out there. Customers and banks obviously are being more cautious. But that being said, we will continue to see strong demand obviously in single-family residential mortgage lending with some new commercial initiatives we have and some new hires we've got on board. I would expect to see continued growth in C&I. Residential construction lending remains robust, and absorption, as you will know, is very solid in all our markets across the board. So, on the consumer side, we're obviously watching that very closely. Our indirect portfolio continues to run off, but it continues to perform extremely well in terms of delinquencies and charge-offs there. So, all in all, we feel confident in our ability to still have cautious but solid loan growth as we look into the second half of this year.

Operator, Operator

Our next question is from Christopher Marinac from Janney Montgomery Scott. Go ahead.

Christopher Marinac, Analyst

Thanks. Good morning. Palmer and Nicole, can you talk about the mortgage gain on sale? How strong it was this quarter and kind of where that could go in the near term? And then maybe over the longer-term kind of where do you think it should settle down under more normal circumstances?

Nicole Stokes, CFO

Sure. So, the gain on sale percentage came in right around 3.53. That was definitely elevated, and some of that was -- we do anticipate that coming back down. And then just our volume, we did $2.6 billion in volume for the quarter. I feel like the third quarter, what we've seen so far in July, should be strong as well, but we definitely see that coming back down as we get in, just the cyclicality of the fourth quarter and the first quarter. And so, I definitely feel like that's coming down, and that's what warranted my comments on the efficiency ratio. That, I know everybody can get very excited about a 51% efficiency ratio, but it's going to take a lot of work on our side to keep that in the mid-to-low 50s as we see that revenue, and we are very cognizant of that, and we're preparing for that.

Christopher Marinac, Analyst

Okay, great. Thanks for that. And I guess, because the Company is now much larger as a combined entity a year later, does that allow the sort of downside risk to be less just because you have natural efficiencies and that margin while it may go down still can be better than it was historically for Ameris or Fidelity?

Nicole Stokes, CFO

Yes.

Christopher Marinac, Analyst

Okay, great. And I guess the last question just has to do with local deposit activity. Do you think deposits may sort of get back some of the success you’ve had or do you continue to think that deposits will be positive for the next few quarters?

Nicole Stokes, CFO

No, I think that's a great question. So, we do have the PPP effect, and we have probably about 70% of our, what we would call PPP funding still in our deposit base. So, between $650 million and $700 million of those deposits are PPP funds that we anticipate will be used under the PPP program and will eventually flow out of the bank. So, we have -- we're prepared for that, in that we are -- have been approved for the PPPLF program, so we can find those loans through that program at 35 basis points. So, of course, when you do the math on $1 billion roughly at 35 basis points, that's coming out of non-interest income and going into 35 basis points. That's about 2 basis points on the margin, 2 basis points compression on the margin from that impact if those deposits run out as expected.

Operator, Operator

Our next question is from Brady Gailey from KBW. Go ahead.

Brady Gailey, Analyst

So, I mean, you are one of the few that actually saw NIM expansion this quarter, which was great to see. A lot of that came from the reduction in the cost of deposits. Maybe just talk about your ability to continue to reduce the cost of deposits and then just the outlook for the net interest margin? And, how much the NIM was impacted from PPP this quarter?

Nicole Stokes, CFO

Sure. This is a great question, Brady, I appreciate it. So, as far as the NIM goes, the greatest place that we have to protect the NIM is on the deposit side. So -- and I know I said last quarter, expecting some single-digit compression in the margin, and then we ended up expanding the margin. And that really got to do a little bit of a shout out to our bankers who did a great job of controlling the deposit pricing. And really, as I said, we didn't have all the competitive pressure that we've sometimes felt in the past. So I think all banks are in the same boat with the Fed cuts. So we did a great job of reducing deposit rates. Going forward, really, I think our money markets, our savings, there's a very little room to improve those. Our real place to improve is on our CDs. We have about 46% right around $1 billion or 46% of our CDs will be priced over the next six months, the remainder of this year. Those are currently at 158. So in our April through June production, so our second quarter production was at 37 basis points. So again, I've got about $1 billion of CDs rolling off at 158. And then over 2021, I've got another 44% of the CD portfolio about another just about another $1 billion. That's currently at 118. So, our second quarter total cost was about a 149, our production was 37 basis points. So that's really where I have the biggest ability to affect the market and control it. So, we do have additional loans, we expect some loans to reprice lower. And as that happens, kind of my defense is, is those CD costs. So, to summarize all that, I hate to be a repeat of last quarter, but I would still say single-digit, potential for some single-digit margin compression going into the second half of the year.

Brady Gailey, Analyst

Okay, all right. That's helpful. And then any color on where you think discount accretion will be going forward? I know it's lumpy and sounds like you had some kind of one-time repayments this quarter, which pushed it up. Going forward, outside of any sort of large prepayments, any idea where accretable yield will run?

Nicole Stokes, CFO

I will even say accretable yield, how about if I kind of give you some guidance on the accretion income? I think that's what I'll normally give that guidance. So we have previously said $12 million to $15 million for the year. We've hit that already because of those prepayments. So, we anticipate about $4 million to $5 million a quarter going forward.

Brady Gailey, Analyst

All right. And then lastly for me. Palmer listening to your M&A comments, that sounds like when M&A does come back for the industry, you guys will be ready. But can you update us on any specific geographies that you would be interested in longer term? And what the ideal target size would be for Ameris?

Palmer Proctor, CEO

Yes, if you look at our current footprint, Brady, there's a lot of opportunity. I think within our existing footprint as we cover just through the core banking operations in the traditional bank for different states. And then if you look at our loan production offices, that takes us up pretty much throughout the southeast. So, I think it would be obviously southeastern in nature in terms of our desire to grow some of those markets. In terms of deal size, for us right now just given where we are, I would expect a deal anywhere from $2.5 billion up, $2.5 on the low end. So that's kind of what we would be in our sweet spot.

Operator, Operator

Our next question is from Jennifer Demba from SunTrust. Go ahead.

Jennifer Demba, Analyst

Two questions from me. First of all, Palmer, you talked about the talent you hired recently. Can you give us some more color on that? And what the outlook is in terms of loan growth out of those individuals? And my second question is on expenses. I think you had $149 million in core expenses in the second quarter with the branch consolidation you announced. Are we looking at sequentially lower expenses next quarter or in the third quarter?

Palmer Proctor, CEO

We were pretty proactive in our approach on the branch optimization and we continue to look at that, and we'll have some cost savings there in addition to the leases that Nicole mentioned. In terms of opportunities with new hires, we had hired Todd Shutley a few weeks ago. He was a former SunTrust banker. He's running our specialty lines and he comes to us with a vast amount of experience and breadth of knowledge of capital markets and of the special lending groups. We're excited to have him on board here in Atlanta. We also are excited to announce we've got a new head of Bennett, Florida, just going to run the Florida market for us, a former SunTrust banker there as well. And he's been running a big part of the state for SunTrust. So, he'll be coming out soon, and we'll be having a press release on that coming up shortly. And then, we've also got a relatively new initiative that will start for us in Augusta, Georgia, who is a former banker who ran commercial banking for the prior State Bank for Cadence, Remer Brinson. Remer is going to join us in Augusta and build out the Augusta market for the bank. So, we're excited to have those three core individuals that are focused on commercial growth for us as we move forward. And with that, obviously, the expectation is of continued deposit growth.

Nicole Stokes, CFO

So, on the expense side, when you look at that, you said that the core expenses of about $150, about $65 million of that was mortgage, and about $20 to $23 million was elevated because of the origination income. So if you look -- and I'm looking at Slide 11, where I kind of look at just the banking segment, that blue bar running about $83 million, I think that's a good number. Then mortgage and the lines of business are really what makes that fluctuate. As we have identified these cost saves, a lot of that will be reinvested to pay. We're kind of finding a way to fund, to self-fund our innovation, our technology, some additional costs that we have as we've grown. So, I think the core side will be fairly flat.

Operator, Operator

With no further questions, this concludes the second-quarter conference call. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.