Earnings Call Transcript - ABCB Q1 2020

Operator, Operator

Good day. And welcome to the Ameris Bancorp First 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, Eric. 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 it 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 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. Obviously, today’s discussion is going to be a little bit different than prior quarters because these are unusual times and things are changing daily. As I’ve said in the press release, in the first quarter, this has been unprecedented given that we had COVID, we had CECL, the Fed cuts and the stimulus package. But, I wanted to start off by talking about 2019 and first and foremost thanking our frontline and all our teammates for their herculean efforts to accommodate our customers and our communities. Certainly, our investment in technology that we’ve made over the years has served us well. We’ve got about 75% of our teammates working remotely and, more importantly, they are working effectively, including our call center in this environment. All of our drive-thru locations are open, and we’ve been able to perform business through the drive-thru. Our branch lobbies are obviously closed, except for appointment only. I am pleased to say that we’ve experienced about a 23% increase in the growth of our number of mobile banking customers since the beginning of the pandemic, and we’ve seen strong increases in the number of remote deposits taken through the mobile banking app, as you would expect. But, we continue to see people opening up checking accounts via our online portal and also using our drive-thru facilities. We believe these are some of the positive impacts that the pandemic may have created for us in terms of the future outlook, primarily in migrating a lot of the late adopters to digital banking. I’d emphasize that through the pandemic, we continue to serve our customers and communities. Beginning on March 11th, we enacted our DR Program, which allows borrowers impacted by COVID-19 the opportunity to extend their payments for 90 days. This program is similar to what we enacted after the hurricanes, specifically Irma and Michael. We’ve treated these extensions similar to those, which adhere to the published regulatory guidance. As of April 15th, we’ve provided payment relief to almost 5,400 customers, totaling $2.2 billion of outstanding loans across all types and markets. This equates to about 17% of total loans as referenced in the slide deck on page 15 of the presentation. Additionally, we’ve been an active participant in the Paycheck Protection Program. The amount of work that all the participating banks have done to serve customers during this time has been amazing. I’ve heard from many CEOs about the time and energy it took to get this program up and running, and I echo those statements. We were successful during the first round having about 3,200 loans approved for a total of $685 million, and we expect to do about the same number of units during the second round. Hopefully, the President will sign that around lunchtime today, and we’ll get started on that. As for capital, we have suspended our stock-buyback program. We did purchase approximately $7 million earlier in the quarter, before we suspended the program. However, our focus remains on capital preservation and growing tangible book value as we look forward. Regarding dividends, we are obviously comfortable with where we are today, but we’ll continue to monitor that with the economy and environment. I’m pleased to say, Jon Edwards, our Chief Credit Officer, is with us today and he’s available for any questions after our prepared remarks. I did want to hit a few main points in terms of credit before I turn it back over to Nicole for the financial performance. Our annualized net charge-off ratio was 14 basis points of total loans, our nonperforming assets as a percentage of total assets increased slightly to 61 basis points, comparing to 56 basis points last quarter. We have no exposure to oil and gas, and we’ve included additional details on our hotel and restaurant exposure in the slide deck of our investor presentation, as well as showing you the diversification across all the loan types within our portfolio. I’ll stop there and turn it over to Nicole now to discuss our financial results.

Nicole Stokes, CFO

Thank you, Palmer. For the first quarter, we earned $19.3 million or $0.28 per diluted share. This includes a $41 million pre-tax provision for loan loss expense and a $22 million pre-tax write-down of our mortgage and SBA servicing assets. Both of these items are largely due to general economic conditions driven by the COVID-19 pandemic and market interest rate and are not a reflection of our underwriting standards, which we’ve adhered to throughout the cycle. On an adjusted basis, we earned $39.2 million or $0.56 per diluted share, excluding merger charges, servicing asset impairment, COVID-19 charges, legal fees from the ongoing SEC investigation, and the loss on sale of bank premises. However, it does not exclude the large provision for loan loss expense related to the economic forecast and COVID-19 impact. As Palmer mentioned, we implemented CECL on January 1 of this year. So, our day one adjustment increased the allowance for credit losses by $91 million and reduced our capital by a little over $56 million. Our first quarter provision expense or the day two adjustment was $41 million. Approximately $37 million of that expense was related to loan credit losses and $4 million was an increase for unfunded commitments. We had approximately $4.4 million of net charge-off during the quarter, and our ending allowance for loan loss at March 31 was $149.5 million, compared to $38.2 million at the end of the year. Including the unfunded commitment reserve, our total allowance for credit losses was $167.3 million at March 31, compared to $39.3 million at the end of the year. Our adjusted return on assets in the first quarter was 87 basis points, which was a decrease from the 1.47% reported last quarter, and our adjusted return on tangible common equity was 10.98% compared to 18.45% last quarter. Those declines in these ratios are due to the increased provision for loan loss expense just described. Tangible book value declined $0.37 from $20.81 to $20.44 during the quarter. The CECL day one impact was $0.81 of dilution. That was partially offset by $0.12 of retained earnings, $0.31 of unrealized gains in the securities portfolio, and $0.01 from everything else, including stock buybacks completed during the quarter before it was suspended. Our tangible common equity ratio decreased 15 basis points to 8.25% from 8.40% at the end of the year. Our net interest margin declined by 16 basis points from 3.86% to 3.70% during the quarter. Our yield on earning assets declined by 26 basis points, while our funding costs only decreased by 9 basis points. However, our total interest-bearing deposit costs decreased by 12 basis points as we continue to focus on deposit costs. We saw a decline in accretion income compared to last quarter because, if you recall, we had a large acquired non-performing loan that was resolved last quarter. That non-accretable discount came into income through margin. Going forward under CECL, those similar circumstances, those favorable outcomes would run through provision instead of margin. Our core bank production yields declined to 4.55% for the quarter against 4.70%. On the deposit side, we continued the momentum on non-interest-bearing deposits and improved our mix, so that non-interest-bearing deposits now represent over 30.5% of our total deposit compared to 29.9% at the end of the year and 28% the same time last year. Non-interest-bearing deposit production was over 27% of our total deposit production. Excluding the write-downs of mortgage and SBA servicing assets, our growth in non-interest income was exceptional during the quarter. Our mortgage group has continued to have strong production and earnings due to the interest rate environment. Excluding the MSR write-down, during the first quarter, revenue in our retail mortgage division grew over 40%, while non-interest expense in that division grew just a little over 11%, causing significant improvement in their efficiency ratio. We also saw an increase in the gain on sale percentage as we expected. It went up to 2.88% this quarter, up from 2.60% last quarter. For the Company, our adjusted efficiency ratio increased to 59.87% for the quarter compared to 55.61% last quarter. The reduction in net interest income from the margin compression accounted for about 45% or 190 basis points of the increase. Total non-interest expenses were $138.1 million. However, when you exclude adjusted management items, such as COVID-19, margin conversions, our adjusted non-interest expense was $135 million, up about $16.8 million from last quarter. Approximately $4 million of that increase was in the lines of business and attributable to income growth, mostly in the mortgage area that I just discussed. As you can see on slide 11, the remaining $13 million of increased expenses is related to the core bank and administrative functions, including close to $3 million in FDIC insurance that we didn’t have in the fourth quarter because of credit, $2 million of additional audit and legal fees that we don’t anticipate recurring, almost $2 million of cyclical payroll taxes and 401(k) match that are always elevated in the first quarter, a little over $1 million of problem loan and OREO expense, and $1 million related to FDIC claw-back. Majority of these items are not expected to reoccur in future quarters. We’re pleased with where we are in fidelity cost savings. But, we’re committed to cost-saving strategies and improving our efficiency ratio to offset that margin squeeze. On the balance sheet size, we were pleased with our organic growth, both on the loan and deposit side as our loan to deposit ratio ended at about 94.5%. Organic loan growth this quarter was a little over $275 million or about 8.5% annualized. The details of that production is in the investor presentation, but it was split among our bank segment and our lines of business. Our total deposits declined by $182 million, but we reduced our broker deposits by almost $200 million. So, really core deposits grew during the first quarter, which is when we usually have seasonal runoff of municipal and ag deposits. We remain focused on core deposit growth. As stated earlier, our non-interest-bearing deposit production was over 27% of our total deposit production, which is exceptional. We continue to be well-capitalized and feel comfortable with our capital levels, and our liquidity position remains strong. As Palmer mentioned earlier, we were approved for the PPP LS program and plan to use that to fund the PPP loan. Additionally, our current liquidity ratio is over 21%, which is more than double our policy minimum, and we have ample liquidity available to us. With that, I’ll turn the call back over to Palmer for closing comments before the Q&A.

Palmer Proctor, CEO

Great. Thank you, Nicole. Q1 was certainly an interesting quarter. When you think about it, January and February showed great promise for growth and earnings, and then along came March with COVID, and now we’re focused on the safety and security of our teammates and customers. While we’re certainly operating in a new world, I think it’s important for everyone to think in terms of probabilities and not binary outcomes. At Ameris, we remain well-capitalized, well-focused, and well-positioned to ride out the storm, and of course, we’re in this for the long haul. I remain very confident in our ability and strength to get through this. I’ll turn it back over to Eric now, so we can jump into any questions the group might have.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question today comes from Tyler Stafford with Stephens. Please go ahead with your question.

Tyler Stafford, Analyst

I wanted to start on credit for either Palmer or Jon, and just better understand your assessment of the risk of the portfolio today. You’ve built the reserve this quarter and have some portfolios that historically don’t have any losses and then others that do. Where do you see the biggest potential loss content coming from? Can you also highlight some areas that have historically not had any losses that you expect to withstand the storm relatively better?

Jon Edwards, Chief Credit Officer

The portfolio, we spent a number of years remaking into what it is today: well-diversified, quality sponsors, good equities, in the right places and the right deals. I have confidence that our portfolio is going to withstand this. In terms of concern, we’ve got an unprecedented time, and what comes out on the back end of this is what we don’t know yet. Will there be changes to codes in hotels that will need to be handled and things of that nature? My focus right now relates to our retail portfolio, which includes accommodation and individual store locations, as well as strip centers. We’ve had a lot of our customer base take advantage of the payment extensions. We really need to see the retailers back open and business getting back to usual. That’s where it lies at the moment.

Palmer Proctor, CEO

Tyler, I'll add that I don’t think the path of the virus and the economic recovery will be one size fits all. It will be specific to certain geographies. Georgia is opening back up today for the most part, so it’ll be an interesting test case. People are anxious to get back to work. I don’t think people fully appreciate the long-term damaging effects that this pandemic has had on certain sectors, and that’s yet to come. Some sectors will rebound immediately, but I think there’s going to be a lot of pain felt longer term than most anticipate as we look over the next several quarters.

Tyler Stafford, Analyst

Great. Jon, maybe sticking with you or Nicole, I was hoping you could provide some color on the underpinnings of your CECL assumptions, especially the economic forecasted portion of the reserve build this quarter.

Jon Edwards, Chief Credit Officer

Certainly. We used the Moody’s forecast from the March 27th date, I believe. We looked at several scenarios, using judgment after taking the model at face value to determine if we thought things would be better or worse than projected. We needed to consider the impact of government programs, such as the PPP and the stimulus checks, when they would impact the loan portfolio. Our upper band of the CECL range was about 180 in terms of the loan loss reserve, with another 29 in unfunded, total about $210 million. We were within $43 million on the upper end, so we were in the middle of the ranges that we reviewed.

Tyler Stafford, Analyst

That’s helpful, Jon. Lastly, Nicole, I wanted to shift gears to expenses. They were ahead of expectations. While I appreciate the details you provided on the sliding deck, could you help us triangulate what should stick around, what’s going to remain in the run rate, and how you see expense and efficiency migrating throughout the year?

Nicole Stokes, CFO

Sure. About $4 million of the increase was related to mortgage. Their income increased significantly more than that, leading to improvement in efficiency. Exclusive of the $4 million, it was about another $13 million. About $3 million was for the FDIC insurance that we didn’t have in the fourth quarter, $2 million was in audit and legal fees expected to recur, and payroll taxes and 401(k) matches typically increase in the first quarter; plus, $1 million related to fraud and forgery charge-offs, and $1 million for FDIC claw-back. Many of these items won’t recur in future quarters. We’re committed to looking for cost saves and to become more efficient against the margin squeeze.

Tyler Stafford, Analyst

If I total those items you highlighted, should we estimate about $4 million to $5 million that should not persist moving forward? Is that a rough ballpark?

Nicole Stokes, CFO

I’d say it’s closer to $7 million to $8 million. These are expenses related to increased audit, payroll taxes, problem loans, FDIC, and fraud. The FDIC insurance is recurring.

Tyler Stafford, Analyst

Got it. So, Q1 had inflation of $7 million to $8 million that should fall out? Okay.

Nicole Stokes, CFO

There are also smaller expenses related to consulting fees for CECL that will go away, as well as about $200,000 in an FHLB prepayment penalty. Overall, we’re looking at closer to $9 million or $10 million.

Tyler Stafford, Analyst

Thank you, Nicole.

Operator, Operator

Our next question will come from David Feaster of Raymond James. Please go ahead with your question.

David Feaster, Analyst

Good morning, guys. I wanted to follow up on the CECL discussion and the factors that drove it. Considering your commentary, Palmer, and the continued weakness in economic data for the second quarter, how do you think about future reserve builds?

Palmer Proctor, CEO

We will continue to watch the economic forecasts from Moody’s that we adhere to for CECL. We will make necessary adjustments based on our portfolio. We have $50 million worth of accretable discounts in the portfolio that will help support the reserve if necessary on those loans. However, it’s too early to know if we would need to build up reserves to that range as we are on the cusp of reopening.

David Feaster, Analyst

That’s helpful. Also, regarding the PPP program, you mentioned expecting a similar size in the second round. Are you talking in terms of dollars or loans?

Jon Edwards, Chief Credit Officer

What I quoted was more on the units, not the dollars. The second round will have a lower dollar limit than the first round. Our primary focus has been taking care of our clients first and foremost. We’ve also had some external non-customers participate in the program, but the majority are existing customers.

David Feaster, Analyst

That makes sense. Lastly, regarding FHLB balances, can you comment on the core NIM?

Nicole Stokes, CFO

I’ll be cautious on guidance, but mid-single-digit compression is possible going forward. On the loan side, about half of our variable rate loans have floors, and approximately 75% of those are hitting the floors. Loan production was 4.55% compared to 4.70% last quarter, and early payoffs have slowed because of the economy. Regarding funding, we made wholesale deposit reductions in March, and we are continuing to grind down any above-market deposits. Our CD book is repricing about 70 basis points lower than the current rates, with historical retention of about 75% as it reprices down.

David Feaster, Analyst

Thanks, Nicole.

Operator, Operator

Our next question will come from Woody Lay of KBW. Please go ahead with your question.

Woody Lay, Analyst

Just a follow-up on the margin. You mentioned CDs were repricing about 75 basis points lower. What percent of the CD portfolio is set to reprice in Q2 and what percent will reprice in 2020?

Nicole Stokes, CFO

About 20% for Q2, and greater than 50% remaining for 2020.

Woody Lay, Analyst

Regarding the loan deferral program, can you provide color on the pace of deferral requests? I assume it was frontloaded around mid-March, but are you seeing a slowdown in these requests?

Palmer Proctor, CEO

Absolutely. In the first two weeks, we probably had 75% of what we did, and every day seems to be less and less. The pace has certainly dropped below what it was in those first two weeks.

Woody Lay, Analyst

That makes sense. Lastly, I noticed the 23% increase in mobile banking users since self-quarantine. Do you believe consumer behavior might change long term? Would that prompt a reconsideration of Ameris’ branch strategy?

Palmer Proctor, CEO

Absolutely. What’s encouraging is a lot of late adopters to digital technology have been forced to utilize it and have become accustomed to it. It changes behaviors across many markets. All banks are realizing they can do a lot more with less in terms of full-scale branches. You may find some branches become drive-thru only or utilized for other initiatives rather than maintaining full overhead.

Woody Lay, Analyst

Thanks, guys. That’s all I had.

Nicole Stokes, CFO

Thank you, Woody.

Operator, Operator

Our next question will come from Christopher Marinac of Janney Montgomery Scott. Please go ahead with your question.

Christopher Marinac, Analyst

Good morning. I wanted to drill down on the large amount of deferrals. How do you think about that in relation to risk ratings in the portfolio? Are these loans temporarily adjusted or could they ultimately become classified in the future?

Jon Edwards, Chief Credit Officer

We’ve seen an increase in what is our grade five, which is the lowest pass grade. If we see weakness, we’ll make adjustments to grades, but it doesn’t automatically mean they’ll go to the watch list. We intend to be purposeful in how we deal with it. Some customers took advantage of the deferral to preserve liquidity. Right now, we’re evaluating them carefully.

Palmer Proctor, CEO

During the last downturn, deferments were viewed negatively. But this time, it has been proactive, as companies are preserving liquidity and cash flow. That’s good cash management. A lot of our commercial customers have been proactive rather than reactive. If we see a continued escalation in deferment percentages, it may change the narrative.

Christopher Marinac, Analyst

I know it’s early, but can you talk about new opportunities you’re seeing with customers, either existing ones for deeper wallet share or new customers coming in?

Palmer Proctor, CEO

The biggest opportunity right now is probably the PPP plan. Many non-customers are upset with their primary banks for not allowing participation and have turned to us. We’ve gained significant business by allowing them to join the program, leading to complete relationship moves. We’ve capitalized on that and will continue to do so, alongside mortgage areas. Companies are open to discussions with other banks, providing us strong defensive opportunities.

Christopher Marinac, Analyst

Thanks very much.

Nicole Stokes, CFO

Our liquidity remains double our policy minimum and we expect to maintain it for a while as we get through this uncertainty.

Christopher Marinac, Analyst

Got it. Thank you.

Operator, Operator

This concludes our question-and-answer session. The conference has now concluded. Thank you very much, everybody, for attending today’s presentation. You may now disconnect.