Ameris Bancorp

Good morning. Welcome to Ameris Bancorp's second quarter 2020 financial results conference call. Our participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2. 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 amairsbank.com. I'm joined today by Palmer Proctor, our CEO, and John 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 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.

Thank you, Nicole, and thank you to everyone who's joining our call today. I'm excited to share with you our second quarter results as we successfully navigate in this new environment. Nicole's 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 47 cents 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 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 and 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. Non-interest-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 had 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 of the 90-day modifications. The speed and level of requests have slowed down through July 15th We have provided payment relief of $80 billion with outstanding loans. Thus far, customers requesting a 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 15th. 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. 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 revision 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. are non-performing 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 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. Now, 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 earn $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 1166 compared to 1098. Both of these ratios are less than historical levels due to the increased provision for line loss expense. Tangible book value increased 46 cents from 2044 to 2090 during the quarter. Our tangible common equity ratio decreased 55 basis points. to 770 from 825 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 815 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 370 to 383 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 occur in future quarters. Our core bank production yields declined at 416 for the quarter against 455 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 30.53 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 outcome 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 in June 30 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 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 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 288 last quarter. Net income in the retail mortgage division increased to 53.5 million for the quarter. Total non-interest 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 of fellow 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 $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 saves. 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. We also have an initiative to reduce our lease expense on non-retail banking offices that we can eliminate or consolidate into other facilities. 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 phase 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 phase to really drive the cost phase 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 just over 11% annualized. However, approximately half of that loan growth was seasonal growth in our warehouse and ag lines 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 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. 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. Thank you. 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.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question is from David Feaster from Raymond James. Go ahead.

Hey, good morning everybody.

Good morning, David. I appreciate the commentary on re-deferral rates. In the early read, 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. I guess, how do you think about re-deferrals going forward? I mean, did you adjust any risk ratings for the re-deferred loans and did you require any additional collateral or personal guarantees? Any thoughts on those trends going forward?

Maybe the re-deferrals and the We looked at each other individually, and as they were in the hotel sector primarily, we pretty well knew, because we 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 an additional hotel as collateral, and the personal guarantees are pretty well on there. That really, I think, is more of a function, and you know this, that... Okay. Okay.

Okay, that's helpful. And then I guess, you know, taking that into account, I mean, how do you think about reserve bills going forward? It seems like most of the heavy lifting has largely been done. But as you continue to see re-deferrals and maybe some risk rating downgrades and some modest grade migration, would you expect to see additional reserve bills 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'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.

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 where you're 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 increasing cases 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, appetite for credit in your markets?

Dave, this is Palmer. Yeah, good question. Right now, 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 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. Okay, that's helpful. Great quarter, guys. Thank you.

Our next question is from Christopher. Marinak from Jenny Montgomery Scott. Go ahead.

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 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 353. That was definitely elevated, and some of that was higher. 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, third quarter will be strong as well. But we definitely see that coming back down as we get just the cyclicality of the fourth quarter and the first quarter. So I definitely feel like that's coming down. And that's what warmed 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're very cognizant of that and we're preparing for that.

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.

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. 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 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're prepared for that in that we are have been approved for the PPPLF program so we can fund those loans through that program at 35 basis points. And of course, when you do the math on a billion dollars, roughly at 35 basis points where it's coming out of non-interest income, I'm sorry, coming out of non-interest bearing deposits and going into a 35 basis points, that's about two basis points on the margin, two basis point compression on the margin from that impact if those deposits run out as expected.

Great. Thanks very much for the information this morning.

Sure. Great.

Thank you, Christopher. Our next question is from Brady Gailey from KBW. Go ahead.

Hey, thanks. Good morning, guys. Good morning. So, I mean, you all are one of the few that actually saw NIM expansion this quarter, which was great to see. You know, 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 them. So as far as the NIM, the greatest place that we have to protect the NIM is on the deposit side. 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 our savings 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 a billion dollars, or 46% of our CDs will be priced over the next six months, the remainder of this year. Those are currently at a 158. So in our April through June production, so our second quarter production was at 37 basis points. So again, I've got about a billion dollars of CDs rolling off at 158 and then over 2021, I've got another 44% of the CD portfolio, just about another billion dollars. That's currently at a 118. So our second quarter total cost was about 149. 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 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 towards? 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 Accredible Yield will run?

Well, I will usually say Accredible Yield. How about if I kind of give you some guidance on the accretion income? I think that's how we normally give that guidance. So we had previously said $12 million to $15 million for the year. We've hit that already because of those prepayments. so we anticipate about four to five million a quarter going forward.

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

Yeah, 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, four 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. That would be our sweet spot. Great. Thanks.

Thank you, Brady. Our next question is from Jennifer Demba from SunTrust. Go ahead.

Thank you. Good morning. Two questions for 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. We were pretty proactive in our approach on the branch optimization and we continue to look at that and we'll have some call saves there in addition to the leases that Nicole mentioned. In terms of opportunities with new hires, we had hired Todd Shetley 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 down in Florida that's going to run the Florida Markets Press, 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 out shortly. And then we've also got a new initiative, a relatively new initiative that'll start for us in Augusta, Georgia. There's a former banker who ran commercial banking for the prior state bank for Cadence, Rima Brinson. Rima's 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, there's 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, about $65 of that was mortgage, and about $20 to $23 of that was elevated because of the originations. 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. I think that's a good number. And then mortgage and the lines of business are really what makes that fluctuate. As we have identified these cost savings, a lot of that will be reinvested to pay. We're kind of finding a way to fund, to self-fund our savings. Innovation, our technology, some additional costs that we have as we've grown. So I think the core side will be fairly flat.

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

So those 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.

Jennifer, one name I left out too, we've hired someone to head up treasury for us that's coming from Regions Bank that will be also putting a press release out that he's going to be spearheading that initiative for us.

Thanks so much.

Mm-hmm.

Thank you, Catherine. Again, if you have a question, please press star then one. Our next question is from Kevin Fitzsimmons from DA Davidson. Go ahead.

Hey, good morning, everyone. Good morning. Just wanted to see if we can get an update on PPP-related fees and 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? Thanks.

Kevin that's a great question and the I'll try to get out my crystal ball. We still have about $35 million of fees that we've not taken into income yet. About 95% of the PPP loans have a two-year maturity and about 5% have the five-year maturity. That gives you an idea of 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 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, Thank you for having me.

Yes, very helpful. Thank you. 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 what your sense is there and how you see things going.

Thanks. 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 Whereas 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.

Okay. Thanks very much.

Thank you. 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.