Ameris Bancorp Q1 FY2022 Earnings Call

Hello, everyone, and welcome to the Ameris Bank First Quarter Earnings Conference Call. My name is Juan, and I will be coordinating your call today. Now, I would like to turn the call over to Nicole, Chief Financial Officer. Please, Nicole, go ahead.

Great. Thank you, Juan, and thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our website at amerisbank.com. I'm joined today by Palmer Proctor, our CEO; and Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening general comments, and then I'll discuss the details of our financial results before we open 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, and the actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the Company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix of our presentation. And with that, I'll turn it over to Palmer.

Thank you, Nicole, and good morning, everyone. I appreciate everybody taking the time to join our call today. I am really pleased with the financial results we reported yesterday and excited to share some of the highlights with you from the quarter. Thinking back to some of our core fundamentals that I mentioned on last quarter's call, I constantly remind us of the importance of discipline and ability to stay focused on strategies and execute on the things that we can control. Our results this quarter are reflective of those high expectations. The first of those fundamentals was consistent earnings with an ROA we said in a range between 130 and 140 and ROTCE well above 15%. This quarter, the adjusted results represent a 131 ROA and a 16.8% return on tangible equity. Both of those are within the high-performing range we had targeted. The second thing we talked about is in terms of fundamentals meeting the growth expectations and maintaining a strong pipeline, and we're fortunate to be positioned well in the Southeast with talented bankers in all of our markets. In this quarter, we continued to deliver on this growth. We had strong organic growth; it’s encouraging that we're seeing such growth opportunities in our markets, especially as the Southeast gets back to business. But we continue to anticipate 2022 loan growth in the upper single digits, and we certainly have the liquidity to fund that growth. As expected, deposits did decline this quarter due to our cyclical municipal deposits at year-end, but we continue to grow more importantly low-cost deposits this quarter, and our non-interest-bearing deposits now account for 40% of total deposits. This low-cost deposit mix is certainly going to help us better control betas in a rising rate environment. The third fundamental is asset sensitivity and its impact on margin and NII, which ultimately affects capital. We continue to have an asset-sensitive balance sheet with 30% variable rate loans and an additional 15% of short duration fixed rate loans that behave like a variable rate loan. This quarter, our margin actually expanded by 17 basis points and our NII increased by $5.7 million or just over 3% compared to last quarter. Our team was well paid through when most banks are experiencing dilution due to unrealized losses in the security portfolio. Over the past year, from March '21 to March '22, we increased our tangible book value by over $1.57 or 6.2%, inclusive of the purchase of Balboa. We've been good stewards of capital over the last five years and have seen tangible book value grow by over 10% annualized. And remember that includes five acquisitions and we're very cognizant of dilution and earn-back periods. Since I mentioned Balboa, let me jump into the fourth fundamental from last quarter, which was Balboa and the positive impact they would have on our core banking segment. The integration is going extremely well, and we're pleased with the leadership and the results. Their net loan growth was $57 million for the quarter or over 33% annualized, and their total production was just over $131 million. This growth was funded with existing liquidity in addition to paying off their remaining high-cost borrowings during the quarter. Credit in that portfolio remains solid and in line with our expectations. Overall credit quality remains strong. Our annualized net charge-off ratio was 9 basis points of total loans, and our non-performing assets as a percent of total assets was 47 basis points. Jon Edwards, our Chief Credit Officer, is with us today and will take any questions after our prepared remarks. But I want to conclude by reiterating that we remain focused on our core fundamentals, and we're disciplined in our actions. We've got strong momentum coming into the first quarter, and we're excited about our future due to solid fundamentals of organic growth, balance sheet management, a rising rate environment, top-of-class financial results, and of course, capital preservation. I'll stop there and now turn it over to Nicole to discuss our financial results.

Great. Thank you, Palmer. For the first quarter, we're reporting net income of $81.7 million or $1.17 per diluted share. On an adjusted basis, we earned $75 million or $1.08 per diluted share when we exclude our servicing asset recovery, merger and conversion charges, and a gain on sale of bank premises. Our adjusted ROA was 1.31%, and our adjusted return on tangible common equity was 16.38%. As Palmer mentioned, we grew tangible book value by $0.58 per share or 2.2% this quarter to end at $26.84. We had $1.02 from retained earnings that was offset by $0.25 at AACR from the decline in unrealized gains on the bond portfolio and then $0.19 of deletion from other items, including the stock we bought back. We've been disciplined with our investment portfolio, and because of the strategy, we saw less than 1% dilution in our tangible book value from the decrease in AOCI. Compared to this time last year, our tangible book value was at $1.57 or just over 6%. Our tangible common equity ratio was 8.32% at the end of the quarter compared to 8.05% at the end of the year. The approximate $3 billion of excess liquidity that remains on our balance sheet negatively impacted this ratio by 130 basis points. Moving on to net interest income and margins. Our net interest income for the quarter increased by $5.7 million. That was driven by $13.2 million in the bank segment, offset by a decline in other segments. Our net interest margin increased by 17 basis points from 3.18% to 3.35% during the quarter. We had 12 basis points of expansion due to the higher loan yields and average balances, 5 basis points due to reduction in the use of some of our liquidity, and that was offset by a decrease in the yield on the bond portfolio. We have about $3 billion of excess liquidity to remain. We anticipate net loan growth this year in the high single digits, about $1.1 billion to $1.4 billion. Moving quickly on the balance sheet, we ended the quarter with total assets of $23.6 billion, down slightly from the $23.9 billion at the end of the year. We're pleased with our organic loan growth of $269.5 million or 6.8% annualized for the quarter.

I just wanted to start with some of the moving pieces of Balboa. I know they had an impact on the expense side and then on the fee income side. I think fees came a little higher than you were thinking. Is there any adjustments that should be made to your fusion expenses kind of related to Balboa that we should think about from a forward ongoing run rate point of view?

Yeah, Brady, I think it was a solid quarter. We did have a little lag. We had a few acquisition expenses that came in this quarter from the acquisition. But other than that, we feel like they have a good run rate.

It's great to see you all be active on the buyback here. The stock is notably inexpensive here. It's 1.5x tangible and about 8x earnings. I think I heard you say you have about $63 million of authorization left and you can get more of that, if you want, I'm sure. But how do you think about getting more aggressive on the buyback at this front just with the stock being so cheap?

Sure. So when you look at the stock this past quarter, the big decline has been in the last couple of weeks while we were in blackout. So we haven't been active in the last couple of weeks of March due to that blackout. We're very cognizant of the tangible book value that we could be when the prices are below prior to the blackout, and buying our stock back is probably one of the best investments we can make right now.

Yes. And then on the credit quality front, I know net charge-offs were still kind of close to 0, but NPAs were up a little bit. I think you called out some Ginnie Mae mortgages and maybe some portfolio mortgages that drove that up and the classified and criticized were up some, too. Just bigger picture, I know a lot of those loans are fairly low-risk loans. But is there anything that is worrisome on the credit quality front for you guys at this point?

No, we're not seeing anything, Brady. We're keeping a keen eye across the industry, but we're not seeing any cracks anywhere. The Ginnie Mae issue is just a process of working through it, but right now, we feel pretty good about all our verticals as it pertains to credit.

Okay. And congrats on the tangible book value per share. That's rare to see this quarter. So it's great to see for you guys. All right. Thanks for the color.

Maybe just thinking about wondering NII rates from rate hikes. Could we assume more what is 12% of PPP over the last two quarters? Can you assume that trends down from here on what is sort of your best guess as to what the range would be for that in a higher rate environment, more normalized net sale margins?

Yes. I think your question was about mortgage, particularly regarding retail mortgage. We have always been more of a purchase shop than a refinance shop. We still have some room to go, and I feel like that 12% is probably a good spot for us.

Okay. Appreciate it. Maybe just turning over to the overdraft. I know you guys recently announced some changes to the NFF overdraft policies. And I think last quarter, you sort of said that maybe a 25% reduction from some of the moves. Is that still an appropriate level? Or has that changed?

It is 25%, and I think that may have been misconstrued a little bit. So it's 25% of our charges on overdraft. Last year, that was about $16 million. So that $4 million is the portion we expect to see as a full year impact.

Good morning, everyone. Just curious, it's come up a couple of times, the point about the focus on tangible book and that you actually expanded this quarter. Can you dig in a little deeper into how you did that? Did you hold back on securities purchases when rates were lower or shift to held to maturity?

Absolutely. We let our bond portfolio decline as we received payoffs in this last cycle. We did not go out and buy bonds because we felt the rates were not favorable. We avoided buying these long-term low-rate bonds, and instead, we maintained our mortgage loans held for sale. This strategy helped us maintain a strong tangible book value.

Nicole will be modest, but she and her team did an excellent job. We have received many questions about buying, and being able to stick with those disciplines really paid off for us.

That’s great. As far as expansion, I assume in recent quarters, M&A has been less in focus, but with the stock pulled back, I would assume it's not a primary focus today. But with the organic growth with Balboa, can you speak to any team lift-out opportunities that might come?

Our primary focus is organic. We have not done any M&A over the last three years. Even without bank M&A, you have seen the power of the organic engine. We already have the bankers in place needed to hit upper single-digit loan growth, so we feel confident about our position.

I just wanted to touch on the organic growth outlook. Could you walk through some of the drivers behind that high single-digit pace expectations for the contribution from Balboa? Also, provide any details regarding payoffs and paydown trends embedded in that outlook?

On the commercial front, we remain very bullish. Our pipeline is strong, and we see responsible growth, despite competitive pricing pressures. Payoffs will still be a challenge, but we feel we can offset them with strong production. Mortgage origination has also been consistent, and our addition of Balboa provides valuable diversification.

Thanks for the color on that. What do you expect the pace of expenses to look like, considering inflationary environment, production trends, and continued investments? Can you go over your thoughts?

We are focused on holding expenses flat to slight increases as we look to efficiency and technology expenditures. Our goal is to manage costs while maintaining operational effectiveness.

How are new loan yields acting, and how do you think they will reflect as the Fed tightens in the next couple of quarters?

We're experiencing stronger yields in residential mortgages, which helps improve our margin. Our focus is on maintaining balance and being selective in our commercial loans, especially as competition remains high.

As interest rates go up, what do you feel like are the most vulnerable buckets? Can you talk about where you think Balboa net charge-offs will land as rates go up?

In the commercial segment, we're closely monitoring our office exposure. As for Balboa, their credit quality remains strong, and FICO scores are good, so we anticipate manageable charge-offs.

What is the size of the HFS portfolio looking forward? Considering your guidance of origination in the $5 billion to $7 billion range per year, is the current $900 million level a good level?

It could shrink a little but not significantly. $900 million is likely where we'll stabilize. We do expect to manage production accordingly as we move forward.

Thank you very much for listening to our first quarter call. We're excited about our momentum throughout the entire company. The success we have is due to the disciplined culture and core fundamentals that our teammates consistently exhibit. Thank you for your time and interest in Ameris Bank.

This concludes today's call. Thank you so much for joining. You may now disconnect your lines.