Ameris Bancorp (ABCB) 2020 Q2 法說會逐字稿

Good morning. Welcome to Ameris Bancorp Second Quarter 2020 Financial Results Conference Call. (Operator Instructions) 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.

Great. Thank you, Kate, 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 am 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'll discuss the details of our financial results before we open it up for Q&A. I think I'm supposed to mention here that we're social distancing. Although we are in the same room, we're 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 may 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 a 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.

Thank you, Nicole, and thank you to everyone who has joined our call today. I am 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 reported net income of $32.2 million or $0.47 per diluted share, and that's 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 a significant improvement in our adjusted efficiency ratio, which improved to 51.08%, most of that was due to the efficiencies we garnered in our Mortgage division during the quarter. We continue to identify additional cost saves as a way for us to self-fund future technology and innovation costs. We'll discuss some of this -- 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 a 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 the 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.

And 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 of outstanding loans across all loan types and markets, and that equated to about 17% of total loans. Those were the first to 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 of 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 exceeds $1 billion through July 15.

As it pertains to capital, we remain highly focused on capital preservation and growing tangible book. And as for dividends, we are 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.

Jon 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 nonperforming assets as a percentage of total assets decreased slightly to 59 basis points compared to 61 basis points prior quarter. We have no direct exposure, as we've stated before, to the oil and gas sector, and we've 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 with the uncertainty of COVID in 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.

Great. Thank you, Palmer. For the second quarter, we're reporting 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 forecast 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 0.89%, which was a slight increase from the 0.87% 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 $0.46 from $20.44 to $20.90 during the quarter. Our tangible common equity ratio decreased 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 in quickly reducing funding costs. During the quarter, our yield on earning assets declined by 25 basis points, but our funding cost decreased by 49 basis points, and our total interest-bearing deposit cost decreased 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 accretion 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 noninterest-bearing deposits, and improved our mix such that noninterest-bearing now represent 35.89% of our total deposits compared to 30.53% 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 we model that in our ALCO 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 net charge-offs for the quarter. Our ending allowance for loan loss at June 30 was $208.8 million compared to $149 million at the end of last quarter and $38 million at the end of the year. If you add in the unfunded commitment reserve, our total allowance for credit losses was $246 million at the end of the quarter compared to $167 million at the end of the first quarter and $39 million at the end of last year.

Moving on. Our growth in noninterest 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 noninterest expense were $155.8 million for the quarter. However, when you remove the COVID-19 expenses, the merger restructuring, the fees, the attorney fees on the SEC investigation and the loss on sale of branches, our adjusted noninterest expense totaled $149 million. That was up $14.7 million from last quarter. However, expenses in the Retail Mortgage segment increased $20.8 million due to the variable costs associated with the increased volumes, 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 don't believe the ratio will increase -- 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 saves. We've identified 9 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 nonretail banking offices that we can eliminate or consolidate into other facilities. This is -- all of this is 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 saves 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 saves to really drive the cost save culture with our new employees. We view these cost saves 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 our 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, and that's about over -- 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 brings 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 Slides 21 and 22 in the investor presentation. Our total deposits increased by $1.7 billion during the quarter of which $1.4 billion was in noninterest-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 levels, and our liquidity position remains strong.

And with that, I'll turn it back over to Palmer for closing comments before the Q&A.

Thank you, Nicole. I'd like to thank everyone, again, for listening to our second quarter results. In closing, I'll share with you that we are obviously moving in the second half of 2020, and we're coming up with a marketing strategy and campaign of "Back to Business Together." And I think that's fitting for our company as well as our customers and our communities. And 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 Instructions) Our first question is from David Feaster from Raymond James.

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

David, on the redeferrals, the -- we didn't -- 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 anyway. We didn't go out and get in additional hotels. Collateral and the personal guarantees are pretty well out there. That really, I think, is more of a function, and you know this, is that the 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.

Okay. Okay. That's helpful. And then I guess, taking that into account, I mean, how do you think about reserve build going forward? It seems like most of the heavy lifting has largely been done. But as you continue to see redeferrals and maybe some risk credit downgrades and some modest credit migration, would you expect to see additional reserve builds in the back half of the year?

I think what you said is absolutely the right thing. I think the heavy lifting has been done. And what you'll see from here are going to be more on the individual side. So it will be one-offs that can't get back on their feet. Timely, it will 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.

Okay. Okay. Good. 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 was strategic or you're tightening the (technical difficulty) where you see (technical difficulty) demand? But just any thoughts on Florida, too, obviously, these are concern (technical difficulty) as we compare to (technical difficulty). Just curious any thoughts on loan growth origination activity, appetite for credit in your markets?

Dave, this is Palmer. Yes. Good question. Right now, again, we kind of break it down by individual line of business and, obviously, by the demographics in 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 well know, absorption is very solid in all our markets across the board. And 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.

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

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 sort of the longer term kind of where do you think it should settle down under more normal circumstances?

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, I mean, we did $2.6 billion in volume for the quarter. I feel like the third quarter, what we've seen so far in July, third quarter will 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 then -- 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 as that mortgage revenue rolls off, diligent work on our side to keep that in the mid- to low 50s as we see that revenue. And we were very confident of that, and we're preparing for that.

Okay. Great. 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?

Yes.

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

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 fund those loans through that program, that 35 basis points. So -- and of course, when you do the math on $1 billion, roughly at 35 basis points where if it's coming out of noninterest income -- I'm sorry, coming out of noninterest-bearing deposits and going into a 35 basis points, that's about 2 basis points on the margin, 2 basis point compression on the margin from that impact if those deposits run out as expected.

Our next question is from Brady Gailey from KBW.

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?

Sure. Those are great questions, Brady. I appreciate it. So as far as the NIM, 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 -- I've 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 are saving, those are -- there's very little room to improve those. Our real place to improve is on our CDs. We have about 46%, it's right at about $1 billion -- or 46% of our CDs will be priced over the next 6 months, the remainder of this year, those are currently at 1.58. 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 1.58.

And then over 2021, I've got another 44% of the CD portfolio, about another -- just about another $1 billion. That's currently at 1.18. So our second quarter total cost was about 1.49, our production was 37 basis points. So that's really where I have the biggest ability to affect the margin and control it because we do have some additional loans. We expect some loans to reprice lower. And as that happens, kind of my defense 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, the potential for some single-digit margin compression going into the second half of the year.

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 it sounds like you had some kind of onetime repayments this quarter, which pushed it up. Going forward, outside of any sort of large prepayments, any idea where accretable yield will run?

Well, I will -- you say accretable yield, how about if I kind of give you some guidance on the accretion income. I think that's what will be normal and 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.

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

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 and 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 billion on the low end. So that's kind of what we would be. That will be our sweet spot.

Our next question is from Jennifer Demba from SunTrust.

Good morning. 2 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 third quarter?

Correct. And we were pretty proactive in our approach on the branch optimization, and we continue to look at that, and we'll have some cost saves 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 and 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 -- down in Florida, that's going to run the Florida markets for us, a former SunTrust banker there as well, and who's been running a big part of the state for SunTrust. So he'll be coming on soon, and we'll be having a press release on that coming up shortly. And then we've also got a new initiative -- relatively new initiative that will start for us in Augusta, Georgia. There's 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 of the bank. So we're excited to have those 3 core individuals that are focused on commercial growth for us as we move forward. And with that, obviously, is the expectation of continued deposit growth.

And on the expense side, Nicole?

Sure. So on the expense side, when you look at the -- and you said the core expenses of about $150 million, about $65 million of that was mortgage and about $20 million to $23 million of that 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 kind of the banking segment, that blue bar, running about $83 million. I think that's a good number. And then mortgage and the lines of business are really what makes us 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.

Okay. And can you give us a little more detail on what investments you are making that you're talking about?

Sure. So those that are across the board, we have a digital technology that we're working on improving. We are also doing a significant ATM upgrade, so that our ATMs will be more compatible. We've invested in some new treasury personnel as well as innovation with our treasury products. And then we also -- we are innovating some of our risk practices and allocating some resources there as well.

And Jennifer, one name I left up, too. We've hired someone to head treasury for us, who is coming from Regions Bank, that we'll be also putting a press release out. These will be spearheading that initiative for us.

(Operator Instructions) Our next question is from Kevin Fitzsimmons from D.A. Davidson.

Just wanted to see if we can get an update on PPP related fees. And there's, as you look out, and I know it's not crystal clear, but as we get closer toward a forgiveness period on the loans, and just wanted to get your outlook on when your best guess that would occur? And if that occurs, say, in fourth quarter, what the remaining PPP fees would be? And would you expect those to roll in on the forgiven loans through the margin at that time?

Kevin, that's a great question. And I'll try to get out my crystal ball. But no, we still have about $35 million of fees that we've not taken into income yet. About 95% of the PPP loans have a 2-year maturity and about 5% have the 5-year maturity. So that kind of gives you an idea of when -- if there were no forgiveness and how that would roll in. We do have -- and I think we have it on Slide 16 in one of those bullet points, about 80% of the total and the number of loans, this is not the dollar, but in the number of loans, about 81% are less than $150,000. So if there is a blanket forgiveness piece, there will be a pretty good chunk of ours that will come in faster. So we have modeled our duration to be about a year. I anticipate that forgiveness coming in, I think, fourth quarter, first quarter and maybe pushing into second quarter of next year. Just on a sheer rolling, the majority of ours were all May of 2020. So from a 1-year duration, what we use for modeling, it has it all coming in kind of by May of 2021. If that helped, did I answer all of your questions?

Yes. Very helpful. And just one follow on, just beyond the COVID-sensitive buckets that we've talked about, more broad-based commercial real estate. Just curious I would assume you're watching that very closely and how you -- what your sense is there and how you see things going?

That's a good question. Our customer base, we have a really good quality customer base. They are still fairly active in our markets. And so we are seeing good deals that we have opportunity to do. Although we haven't sort of changed our underwriting bucket, we have certainly become a little more conservative in a couple of areas of down payment and interest reserves that we are asking our customers to put up. So we're still active, and we think our customer base continues to be active. We have done some sharpening of the pencil to be a little more conservative in our underwriting.

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.