Ameris Bancorp Q2 FY2022 Earnings Call

Hello, and welcome to Ameris Bancorp's Second Quarter Earnings Call. My name is Bailey, and I will be your moderator for today's call. I now have the pleasure of introducing today's host, Jennifer Demba, Chief Financial Officer. Please proceed.

Thank you, Bailey. This is Nicole Stokes. I believe Jennifer Demba has just joined the Q&A. Thank you to everyone who has joined our call today. During this call, we will reference the press release and financial highlights available in 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 start with some opening comments, and then I will cover the details of our financial results before we open the floor for Q&A. I want to remind you that our comments may include forward-looking statements, which are subject to risks and uncertainties, and actual results may vary significantly. We outline factors that could cause these differences in our press release and SEC filings on our website. We do not take on any obligation to update forward-looking statements due to new information, early developments, or other circumstances, except as legally required. Additionally, we will discuss some non-GAAP financial measures related to the company's performance. You can find the reconciliations of these measures to GAAP financial measures in the appendix of our presentation. Now, I'll turn it over to Palmer for his opening comments.

Thank you, Nicole, and good morning to everyone. I appreciate you all taking the time to join our call today. I was really pleased with the second quarter financial results we reported yesterday. And as mentioned in the press release, the success we had this quarter goes back to just purely solid banking fundamentals. So when you look at revenue growth, margin improvement, strong quality of our deposit franchise, positive trends in our earning asset mix, tangible book value growth, capital preservation and all of these while improving our operating efficiency ratio. So it's quite a successful quarter for us. And Nicole is going to get into some of the details in a minute, but I'll hit some of the highlights. For the second quarter, we reported net income of $90.1 million or $1.30 per diluted share and $81.5 million or $1.18 per diluted share on an adjusted basis when you exclude the quarter's MSR recovery. These adjusted results represented a 1.40% return on average assets and a 17.18% return on tangible equity. During the quarter, we grew total interest income to over $200 million, and this is the first time we've done that in the history of our company. We were extremely pleased with our positive rebound in the margin this quarter as well. Our net interest margin improved by 31 basis points to 3.66% as we maintain funding cost and continue to grow our noninterest-bearing deposits. On the asset side of the balance sheet, we deployed approximately $1.5 billion of our excess liquidity this quarter by investing approximately $500 million in our bond portfolio and then organically growing loans by $1.4 billion during the quarter. We did record a $15 million provision due to strong loan growth. About half the loan growth was managed growth in the mortgage portfolio and also cyclical growth in our ag and warehouse lines. When you exclude these, the remaining more normalized core loan growth was about 15% and more in line with our projections. So we continue to anticipate that for 2022, loan growth will be in the upper single digits. As you all know, growing tangible book value has always been a key focus for Ameris. In this quarter, we successfully increased tangible book value by $1.05 per share or over 15% annualized. Actually, our tangible book value now is higher than where it was when we purchased Balboa Capital just 3 quarters ago, which is pretty impressive. In terms of operating efficiency, our adjusted efficiency ratio improved to 53.66% this quarter from 56.95% last quarter, and we will continue to look for additional operating efficiencies as we move into the remainder of this year. On the credit side, overall quality remained strong. As previously mentioned, we did report a $15 million provision in the second quarter due to strong loan growth and updated economic forecast. Our annualized net charge-off ratio was 4 basis points of total loans compared to 9 basis points last quarter, and our nonperforming assets as a percentage of total assets was 56 basis points. So we remain really cautiously optimistic as we navigate through the present and future environment, and we're going to continue to responsibly invest in our core business and our teammates. I'm going to stop there now and turn over to Nicole to discuss the financial results in more detail.

Great. Thank you, Palmer. So as you mentioned, for the second quarter, we reported net income of $90.1 million or $1.30 per diluted share. On an adjusted basis, we earned $81.5 million or $1.18 per diluted share when you exclude the servicing asset recovery and the gain on sale of bank premises. Our adjusted return on assets was 1.40%, and our adjusted return on tangible common equity was 17.18%. I was pleased with the increase in tangible book value as we ended the quarter at $27.89 per share, an increase of $1.05 or 15.7% annualized this quarter. As Palmer mentioned, our tangible book value is now back above where it was prior to purchasing Balboa Capital just 3 quarters ago. And also this quarter, we had only $0.16 of dilution from the increase in unrealized losses on the bond portfolio compared to $0.25 of AOCI dilution last quarter. Our tangible common equity ratio increased to 8.58% at the end of the quarter compared to 8.32% at the end of last quarter. We continue to be well capitalized, and we feel comfortable with our capital and dividend level. We have a share repurchase program outstanding until October 31 of this year. During this quarter, we purchased about $5 million, and that leaves about $58 million left on the program. We don't anticipate aggressively purchasing in the next few months. On the revenue side of things, our interest income for the quarter increased $19.2 million over last quarter and $28.8 million from the second quarter of last year. In comparison, our interest expense only increased $374,000 this quarter compared to last quarter, and it actually decreased $695,000 compared to second quarter of last year. This caused our net interest income for the quarter to increase by $18.8 million, which was driven mostly in the core bank segment, offset by about $1.8 million decline in PPP revenue in the SBA division. As Palmer mentioned, we were pleased with our net interest margin as it increased 31 basis points from 3.35% last quarter to 3.66% this quarter. Our yield on earning assets increased by 32 basis points, while our cost of interest-bearing liabilities increased just 1 basis point. About 26 basis points of the margin improvement was from the deployment of excess liquidity into higher earning assets and about 5 basis points was improvement in total loan yields, including the held for sale loan. And of course, I would be remiss if I didn't mention that we were able to improve our noninterest-bearing deposit mix and maintain our deposit costs such that total cost of funds were basically flat. While we are proud of this, we do expect to incur additional deposit costs going forward as we're obviously not able to have a 0 deposit beta in this rising rate environment forever. On the balance sheet side, assets were relatively flat at $23.7 billion compared to $23.6 billion last quarter. However, the shift in earning assets is what really is important here. We've deployed about $1.5 billion of excess liquidity into higher earning assets to include about $500 million in the bond portfolio, and we funded the $1.4 billion of organic loan growth. We still have about $1.5 billion of excess liquidity, which can be used for cyclical deposit runoff and also future loan growth. While we were pleased with the significant loan growth this quarter and the underlying credit of those loans, we don't anticipate the same level of loan growth in the third quarter. The details of the second quarter growth have been included on Slide 17 to recap the summary that Palmer gave earlier. Total deposits increased by $96.5 million during the quarter, but the real win is the mix within those deposits. We actually grew noninterest-bearing deposits by $393 million while our higher cost interest-bearing deposits declined $296 million, so that now noninterest-bearing deposits represent 41.98%, so which is around that of 42% of our total deposits. We continue to be asset sensitive with NII increasing about 3.8% in an up-100 environment. We've updated the interest rate sensitivity information to our presentation. You can see that on Slide 11. Moving on to noninterest income. That decreased about $3.1 million this quarter. We reported a $10.8 million servicing rights recovery compared to $9.7 million recovery last quarter. So excluding this MSR activity, total noninterest income decreased about $4 million, all in the mortgage division as we purposely placed about 30% of their production in the portfolio instead of selling those loans. So while noninterest income declined 5.5% this quarter, expenses in the mortgage division were relatively flat because of the commissions and incentives on that portfolio production. Total production in the retail mortgage group was about $1.7 billion this quarter with an average rate of 4.65% compared to $1.5 billion and $366 million last quarter. Purchase business has returned closer to historic levels at 84% of total activity and has us really prepared for the continued slowdown in refinance. Retail mortgage originations as a percentage of our pre-provision pretax income continued to decline, representing a balanced contribution of about 8.5%. The average gain on sale declined to 2.36% this quarter, but we believe that will increase back to a more normal level around that 2.75% range going forward. And I think I may have said the best for last. Our adjusted efficiency ratio improved to 53.66% this quarter, back under our expected 55% goal. Total noninterest expenses decreased by about $1.6 million from $143.8 million last quarter to $142.2 million this quarter. We saw a $2.7 million decrease in salaries and employee benefits, which was attributed to the normalization of first quarter cyclical payroll taxes, offset by annual salary increases. In addition, we incurred about $1.1 million of planned advertising expenses related to our new marketing campaign in the second quarter. And while we're pleased with our expense reduction efforts and we remain focused on our efficiency ratio, slight increases in noninterest expense could occur in the next few months. But we're still anticipating an efficiency ratio in that 52% to 55% range. And with that, I'll wrap it up by reiterating how we've remained disciplined and focused on operating performance. We're optimistic about the remainder of 2022. I certainly appreciate everyone's time today, and we'll turn the call back over to Bailey for any questions from the group.

We have noticed that many banks similar to yours are choosing to keep a larger share of their residential mortgage production now that rates are more appealing compared to six months ago. Given that you believe loan growth won't be replicated in the latter part of the year, which I completely understand, how do you view the extent to which you will retain residential loan production moving forward?

Sure. So I'll take that. So in the second quarter, we portfolioed about $515 million, and that was at a really good rate of about 4.73% rate of what we portfolioed. And about half of that was variable and half of it was fixed as far as ARMs versus fixed rate production. So we were purposeful with how we managed that and how we put that on, and that kind of compares to mortgage-backed securities, which are going to be a significantly less rate. So we kind of feel like what we did in the second quarter was kind of a one-time event, and we don't anticipate doing that again. And that's really why we kind of drew out the lines of how we looked at our loan growth this quarter to kind of show what we would consider core loan growth more in that 15% range. So we really don't anticipate that again. That was kind of a one-time remix of the portfolio and using some of that excess liquidity.

Okay. All right. That's helpful. And then when you look at mortgage, if you back out the noise from the MSR mark, mortgage was around $48 million in the second quarter. Any way to add a little color to what the outlook of that may be? I mean, it sounds like you guys were expecting gain on sale to come back up from the second quarter level, but maybe production slows. So how do you think about the forecast of mortgage banking fees?

A lot of that is essentially driven by two factors: production and gain on sale. In the first quarter, production was about $1.5 billion, and in the second quarter, it increased to $1.7 billion. However, we did not sell all of the production in the second quarter, and the gain on sale also decreased. Looking ahead, we anticipate production for the year to be between $6 billion and $7 billion. Year-to-date, we're at approximately $3.3 billion in production, and we expect to finish the year closer to $6 billion. I expect the third quarter to be fairly consistent with the second quarter, while the fourth quarter may return to a normal cycle. Currently, we are experiencing about 85% purchase versus refinance. The biggest challenge right now is the inventory available for buyers. Although the situation has improved slightly, it remains a topic of discussion, and I hope this provides the guidance you were seeking.

Yes. Yes, that's helpful. And then finally for me, I mean, you all did a great job in the second quarter of holding deposit costs basically flat. As you said, I know it's not going to be like that forever. But just remind us how you're thinking about what deposit betas could look like for Ameris over the next year or so?

Sure. And so we have based on empirical data of what we have done, and I'll tell you that we did raise board rates right at the end of the quarter. So the deposit rates in the third quarter will definitely be higher than what they were in the second quarter. But we are targeting about a 23% beta, and that's about a 55 in the money market, 20 and now and 10 in savings. So that is our target, and as long we're trying to stay within that, and that's what we have modeled into our ALCO modeling as well.

Yes. And 23%, that's total deposit beta or just interest-bearing?

That's total deposit beta. That 42% noninterest-bearing certainly helps bring that average down.

I would like to follow up on the deposit aspect for a moment. The growth in noninterest-bearing deposits is quite remarkable, especially in a quarter when many others are experiencing outflows. Could you discuss some of the underlying trends you are observing? What expectations do you have for flows? Additionally, how do you plan to sustain core deposit growth to support your organic growth? What are your thoughts on the loan-to-deposit ratio that you would be comfortable with?

Well, I'll take part of that and let Nicole finish up. But I will tell you, David, the value we've seen in the diversification portfolio and growing, especially the C&I side of it is really where you're seeing a lot of that noninterest deposit growth. And so they're good core relationship deposits. I think you're fooling yourself, you don't think there's probably going to be some runoff as we go forward. But I do think it's going to be more prolonged than people anticipate in terms of retaining some of those deposits in light of the uncertainty out in the market. There will be some folks chasing rates. A lot of these deposits on the noninterest-bearing side, as you know, are operating deposits. That doesn't mean they can't sweep some over into a money market or savings account. But we feel good about the base. I think liquidity, as we look forward into this, whatever your outlook may be between now and the next couple of years, I think that's the name of the game. And so we've remained heavily focused even during the pandemic when deposits were just flowing in across the industry and focus on the relationship side of that. So I think we will continue with the efforts on the C&I side, which we'll continue to build out that noninterest-bearing piece and then carefully manage the interest-bearing side. So right now, as you see, we had a little pullback on overall deposits. But with the noninterest-bearing growing, we feel good about our position in terms of being able to manage the future growth in that upper single digits based on what we currently have today. Anything else you want to add, Nicole?

I was going to provide some insights on the growth of demand deposit accounts, differentiating between business and consumer segments. There are two distinct trends to note. For the business side, if we look back to November 2019, following the Fidelity Ameris merger and the subsequent conversion, we see a clean growth trajectory relative to where we currently stand. Approximately one-third of the growth comes from existing customers who have increased their balances, while about two-thirds is attributed to new customers. This illustrates the source of our growth, and our team is doing an excellent job with relationship banking to increase core deposits. On the consumer side, the situation is more balanced, with about 50% of the growth stemming from expanded relationships with current customers and the other 50% from new customers joining the bank.

That's great. That's great. And then maybe just switching back to the loan growth side. Just wanted to get a pulse on the markets. How is demand trending from your perspective? Do you think there was any aspect of a pull forward of demand? Just any commentary on how pipelines are trending, expectations for drivers of growth and whether higher new loan yields may start slowing originations as you push higher rates, especially on commercial real estate.

I think we need to analyze each sector individually. In the mortgage sector, we experienced an increase of around $200 million in production this quarter compared to the previous one. This was largely due to borrowers seeking to lock in rates before they rose significantly. There is definitely some activity in the mortgage portfolio. In commercial real estate, we have seen benefits from rising rates, and many are looking to refinance existing loans. While demand remains strong, banks are now more selective in their lending practices. In addition to regular production, there are many unfunded commitments, which will contribute to incremental volume as we complete projects delayed by labor and supply issues. Most banks already have a solid pipeline alongside potential new business. In commercial real estate, the current strategy allows for selectivity while still aiming to meet targets. Most of the small to mid-sized companies we are working with maintain healthy balance sheets, with plenty of cash and cautious inventory purchasing. While borrowing activity is not as high as desired, we expect it to increase, depending on the forthcoming recession's impact. Conversely, Balboa is performing exceptionally well, surpassing our expectations in terms of production, earnings, and credit quality, and continues to offer strong returns. As for SBA loans, there are significant opportunities moving forward; however, we need to improve our loan generation efforts. As sale premiums decrease, more individuals may start portfolioing these loans. That covers the various sectors, but I’m open to any further questions.

No, that was helpful. And then you touched on the severity of the pending recession. Just curious your thoughts on asset quality maybe more broadly. I mean we had an uptick in nonaccruals, it looks like it's mortgage-driven. Just curious, any commentary on that. And then broader thoughts on asset quality, whether there's anything you're watching more closely or perhaps avoiding. And then any commentary on the reserve, and whether it would be likely to have troughed here or just thoughts on how you think about that.

Sure. Regarding Ameris, the increase in our nonperforming assets was primarily due to some government-backed mortgage loans that we need to manage through the system. I don’t anticipate incurring any losses; it’s mainly a matter of processing these loans. If you exclude these, the situation appears more normalized. However, it’s important to distinguish between normalization and credit deterioration within the industry. Once we reach a normalized environment, it’s crucial not to confuse normalization with deterioration. When assessing individual credit in the industry and the prudence of our underwriting practices going forward, there is significantly more equity in transactions compared to the last cycle. For example, one of the commercial loans contributing to our NPA increase is a strong asset located in a prime area, providing us with multiple options. The underwriting parameters, including debt service coverage and the sponsors involved, will support a positive outlook for the industry, particularly if there’s any downturn in commercial real estate. I feel more confident about our position as a bank and the overall industry in managing potential issues. Comparing our current situation to the last cycle, I don’t believe we will face similar losses. While there will still be challenges related to credit, we are in the risk-taking business and will navigate through them. Currently, our outlook is cautiously optimistic, and we don’t see any significant concerns right now. I do believe there may be increasing pressure on consumers moving forward compared to small and midsize businesses, as the latter have maintained a disciplined approach this cycle.

Palmer and Nicole, I want to ask about liquidity and kind of how you think through using liquidity capacity you have going forward. Do you want to still build it? Or will you kind of use some of the dry powder in the next few quarters?

We currently have approximately $1.5 billion in excess liquidity, which provides us with sufficient resources to support loan growth over the next two quarters. While we are still purchasing some bonds, we have reduced the pace slightly. Our strategy continues to focus on growing core deposits for future funding beyond the next couple of quarters. Typically, at the end of the third quarter and the beginning of the fourth quarter, we see an influx of cyclical deposits from municipalities. If this trend continues as it usually does, we expect to replenish our liquidity by the year's end. We feel confident in our liquidity position, though we do not foresee the same level of growth in the future as we experienced this quarter, particularly with regard to mortgages and the bond portfolio, which is slowing down slightly. Nonetheless, we plan to continue utilizing it.

Great. And on the municipal deposits, does any of that get recast in terms of repriced? And is that at all a high beta issue that you just have to work with?

It's really not. So those are core customers of ours that we bank throughout the year. It's just that they get in a lot of the tax money that comes in kind of in that third, fourth quarter, the end of the third, beginning of the fourth quarter. And then it usually goes back out kind of the end of the first quarter. And that's been in our kind of DNA for a while. So that really doesn't build in and doesn't affect our betas too terribly that's already built into our analysis.

Okay. Great. And then Palmer, what is your thought about new hiring trends and what you're seeing, whether it's on the commercial side or in the mortgage business?

I think today, at least for us and for Ameris, we’re probably a little more surgical and tactical in terms of what we’re looking for in the way of talent. We’ve got, as you know, a wonderful team already in place in mortgage, but we will look for opportunities and be opportunistic. But at the same time, when you saw this quarter, we’re cognizant of the expense side of things, too. And the volumes there are great. If it’s not, then you need to make adjustments. But I think selective hires will probably be in our future. But in terms of the need to – in terms of us hitting our projections and loan growth goals, we’ve got, as we’ve said before, we’ve got the team that we need already in place. So I don’t think you’re going to see incremental overhead expense coming online to accommodate the need for the loan growth. We’ve already got that in place. If anything, we’ll probably be, like I said, a little more surgical in our approach going forward.

Question. Nicole, you said you thought you'd have some more expense growth over the near term but keep your efficiency ratio within your target. Can you just talk about what's going to drive the expense growth over the near term? And then my second question relates to the net interest margin. Just wondering if you have that for the month of June.

Sure. So the first question is on the expense. And I would say that while we don't expect it to be a tremendous growth, I think we've done a really good job of kind of toeing the line and keeping our expenses somewhat flat. And there's reallocation of resources that we've talked about for so long. But we do anticipate that there could be some increases, like we spend the extra million dollars on advertising last quarter. And then the some wage inflation, some wage, some benefit costs that are going up, things like that. But again, we're trying to manage that, still keep our efficiency ratio in that 52% to 55%. I just was guiding to maybe some slight increase, but I don't think it's going to be anything tremendous by any means. And then I think your second question was margin and then what our June margin. So the month of June was very consistent with the quarter margin, maybe a little bit higher than the quarterly average margin because a lot of that really we had the benefit of the third month.

Okay. Great. And if I could ask one more question. Palmer, can you just talk about what you're hearing from the clients in terms of their overall sentiment right now? It seems like based on results we've seen, it has to continue to be pretty positive, but I'm just curious what you're hearing.

Yes. I would echo that same sentiment and all the calls, I love when I’m on calls with our team. There’s still a lot of I’d say they’re cautiously optimistic. And then there are a lot of people trying to be opportunistic in terms of what – it depend on the severity of the recession. But there are a lot of people sitting on the sideline with a lot of money, a lot of cash and they’re in a good position. And that gives us comfort as bankers to know that they’ve got those kind of cash reserves. But in terms of our kind of our middle market clientele and the loan pipeline themselves, they’re very robust and remain robust, but what allows banks to do at this time in this kind of cycle is be a little more selective if they choose to do so, which is what we’re doing. But the demand is still there at this point. I think there’s obviously a lot of negative sentiment that we all hear it each and every day on the news and media, but contrary to that in terms of just operating and our operators, they’re still, to your point, very optimistic at this point.

The first question today comes from Brady Gailey from KBW.

Thank you, Bailey, and I want to once again thank everybody for joining the call today and conclude my remarks by reiterating how proud I am of our quarterly results and, more importantly, our teammates made it happen. I’m constantly reminded each and every day of the importance of discipline and the ability to stay focused on our core fundamentals, which we have done. We certainly have the skills. We have the markets and the talent to execute on our strategies and remain very committed to top-of-class results. And I just want to thank you all again for your interest in Ameris Bank. Have a great day.

Thank you. This concludes today's conference call. You may now disconnect your line.