Ameris Bancorp Q2 FY2024 Earnings Call

Good day, and welcome to the Ameris Bancorp Second Quarter Conference Call. All participants will be in a listen-only mode. 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.

Thank you, Alan, 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 Doug Strange, our Chief Credit Officer. Palmer will begin with some opening general comments, and then I will discuss the details of our financial results before we open up for Q&A. Before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also, during the call, we will discuss certain non-GAAP financial measures in reference to the company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I'll turn it over to Palmer for opening comments.

Thank you, Nicole. And good morning, everyone. I appreciate you taking the time to join our call today. I'm very pleased with the outstanding second quarter financial performance we reported yesterday as well as our strong year-to-date metrics. I really want to highlight three major successes for the quarter. First, we grew deposits by $446 million or over 8% while reducing broker deposits at the same time. Second, we grew earning assets by over 14%. And last but not least, we did all of this while expanding our margin. These three components are reflective of a franchise that continues to show discipline and focus on growing long-term shareholder value, our top-tier core profitability, the strength of our balance sheet and our strong Southeastern markets is really what sets us apart. For the second quarter, we reported net income of over $90 million or $1.32 per diluted share. This represents an ROA of 1.41% and a PPNR ROA of over 2.25%. Our margin expanded to 3.58 this quarter, and our net interest income increased by over $10 million for the quarter. Our strong balance sheet includes a diversified loan portfolio with healthy reserves funded by strong core deposits. Loans grew over $392 million, with approximately 46% of that growth in cyclical mortgage warehouse lines. As I said earlier, to fund the loan growth, we grew core deposits over $446 million without increasing broker deposits. We improved our CRE concentration to capital ratio down to 274% and our allowance for credit losses represents a healthy 160 coverage ratio. Capital remains strong at the bank with tangible book value increasing to $35.79 per share, and our TCE ratio was 9.72% at the end of the quarter. Ameris continues to be located, as you know, in some of the most attractive markets nationwide with our 5 state Southeastern footprint expected to grow at approximately 1.7 times the national average. These robust markets continue to give us the opportunity to grow organically at industry-leading levels, which is evidenced by the second quarter's annualized growth of approximately 7% to 8% in both loans and core deposits. Given our growth and success over the years, we also moved the listing of our shares to the New York Stock Exchange on Tuesday, July 23. We like the exchange's reputation for listing well-established companies and believe our listing helps to elevate our presence in the marketplace. Before I turn over to Nicole for more details on the financials, I want to summarize why I remain positive on our future and our ability to return shareholder value. First, we remain focused on growing tangible book value, which is evidenced by our over 14% annualized growth rate and tangible book value per share this quarter. Next, we have core profitability with an average above peer PPNR ROA of over 2%. Our strong balance sheet is well capitalized with diversified earning assets in the strongest markets in the Southeast. We have a healthy allowance for credit losses to absorb potential economic challenges. If you look at our funding base, it's very granular and above average level of noninterest-bearing deposits, and we have a proven culture of expense control. All of these components, along with our focus on discipline are what drive our optimism for the remainder of 2024 and into 2025. I'll stop there and turn it over to Nicole to discuss our financial results in more detail.

Great. Thank you, Palmer. As you mentioned, for the second quarter, we're reporting net income of $90.8 million or $1.32 per diluted share. During the quarter, we recorded a $12.6 million gain on the conversion of our Visa Class B shares. And then we also strategically sold a portion of our MSR portfolio for a $4.7 million gain. We used some of that capital to restructure our BOLI investments. The BOLI transaction will more than offset the loss revenue from the MSR sale and we have the ability to regenerate additional MSR revenue going forward. These also reduced our asset sensitivity in a down environment. Excluding these items, our adjusted net income was $80.8 million or $1.17 per diluted share. Our adjusted return on assets improved to 1.25% and our adjusted return on tangible common equity improved to 13.35%. We remain focused on growing shareholder value. As Palmer mentioned, we ended the quarter with tangible book value of 35.79, which was an increase of $1.27 or 14.8% annualized this quarter. We repurchased approximately $3 million of common stock during the quarter at an average price of $47.12 and we have approximately $91.7 million remaining through the end of October. On the revenue side, our interest income for the quarter increased $17.9 million, and our interest expense only increased $7.3 million. So that allowed our net interest income to increase by $10.5 million. Included in interest income this quarter was $2.3 million of bond income related to the accelerated accretion on early payoffs and then also some positive inflation adjustments on some TIPS bonds. We were really pleased with our margin this quarter. It expanded 7 basis points to 3.58% from 3.51% last quarter, but our margin for the quarter, excluding the 4 basis point lift from those one-time bond income would have been 3.54, which is right in line with our previous guidance of 2 to 3 basis points of expansion. A few more quick details on the 7-point change. The one-time bond income was 4 basis points positive. Our asset sensitivity and asset mix changes were 8 basis points positive. And then those were offset by 4 basis points of beta catch-up and 1 basis points of deposit mix change. During the second quarter, we recorded a $19 million provision for credit losses, bringing our coverage ratio up to 160 of loans and 330% of portfolio NPLs. And while I'm on credit, let me just mention real quick our NPA ratio at just 39 basis points, excluding the Ginnie Mae and our charge-offs improved to just 18 basis points compared to 25 basis points last quarter. Adjusted noninterest income increased $6.3 million, mostly in the mortgage division due to the increase in production. Our total adjusted noninterest expense increased $10.5 million, split evenly between the banking unit and the lines of business. The increases were mostly related to variable compensation from increased production, less deferred costs in our Equipment Finance division, some strategic marketing expenses for a new deposit campaign and increases in fraud losses. Our efficiency ratio was 51.68% for the quarter, and our adjusted efficiency ratio was 55%. We expect the adjusted efficiency ratio to moderate back downward for the remainder of the year. On the balance sheet side, we ended the quarter with total assets of $26.5 billion compared with $25.2 billion at the end of the year, and total earning assets increased $865 million to end at $24.4 billion. We have approximately $310 million of bonds maturing in the third quarter, and we prefunded roughly half of those maturities this quarter. The new bonds came in at about 115 basis points higher than the soon-to-be-maturing bonds. Loans held for sale increased about $206 million due to the summer seasonality. Portfolio loans increased $392.3 million or 7.7% annualized and deposits increased $446.8 million or 8.6% annualized. Our noninterest-bearing deposits still represent a healthy 31% of total deposits, and our brokered CDs actually declined $5.2 million this quarter. We continue to anticipate 2024 loan and deposit growth in the mid-single digits, and we expect the deposit growth will continue to be the governor on loan growth. And with that, I'll wrap it up and turn the call back over to Alan for any questions from the group.

We will now begin the question-and-answer session. Our first question comes from Catherine Mealo of KBW. Please go ahead.

Thanks. Good morning.

Good morning.

I want to start with the margin. Really nice margin expansion this quarter. I wanted to see if you could give us kind of an outlook for what you're seeing for the back half of the year?

Sure. I want to agree with you. We're really proud of our margin this quarter. We still model to be slightly asset sensitive. And so really, a lot of our guidance is based on deposit costs. We said last quarter that when we were at 3.51 that we thought kind of bouncing around that 3.51 up or down 2 to 3 basis points, and that's really where we came in on the positive side of that. So we are still saying that same low single-digit, maybe 2 to 3 basis points expansion or compression. So kind of hanging in that 3.52 to 3.55 range for the back half of the year is what we anticipate.

What do you think would lead to that? Is it just higher deposit costs in the second half of the year, possibly more than expected, that would cause that to decrease? Or in a scenario where there are no cuts, why wouldn’t it continue to expand or perhaps remain more stable?

Yes, I believe that when you analyze it, it appears to remain stable or possibly expand. However, one of our main focuses is on growing net interest income rather than just looking at the ratio. We have indicated that deposit growth will be a key factor in determining loan growth. If necessary, we are willing to sacrifice some margin to continue growing our core deposits and to safeguard our deposit base. This would then allow us to leverage that deposit base to expand our loans. While we might experience slight expansion or a stable to low net interest margin, we would use this to cover deposit costs and enhance net interest income.

Great. That's very helpful. Thank you, Nicole. And then maybe one other on mortgage has just been a really nice story for you in the first half of the year. Can you just talk a little bit about what you're seeing there and your outlook for the rest of the year?

Yeah. Good morning, Catherine. I think with mortgage, it certainly has been a big performer for us this year, in the first half of the year. Keeping in mind, too, there's a lot of seasonality historically and obviously, in today's environment as it pertains to the housing market. So I think seasonality will start kicking in really in the third and fourth quarter. Mortgage will still be a major contributor for us because they're just performing on all cylinders. But at the same time, I don't see a surge in mortgage production between now and the end of the year just given the environment that we're in and given the seasonality of the business.

Right. Thank you. Great quarter, guys.

Thank you.

The next question comes from Christopher Marinac of FIG Partners. Please go ahead.

Hey, good morning. I wanted to ask about the kind of retention of capital going forward. Is there a point, Palmer or Nicole where there's sort of too much capital, maybe not too much, but just sort of how do you manage that as you continue to build each quarter and each year?

Yes. Thank you, Chris. I would tell you, in this environment, we feel very comfortable with the capital position we're in right now, and it gives us great optionality. I don't see us changing anything between now and the end of the year, if that's your question. There's certainly an opportunity to revisit the dividend. Obviously, you have the buybacks in place. But right now, I think given the environment we're in and given the volatility in the environment we're in, we feel very good about how we're positioned. But it also gives us a lot of offensive type of capital as we move forward, if things stabilize on a go-forward basis once we get into 2025.

Great. And just one kind of credit question. Good results this quarter, both on the criticized and even in equipment finance. Is there anything out there that you see that would just be challenging into next year, whether it's on the maturity side or just other changes in the marketplace?

Chris, actually, no, we don't. You mentioned equipment finance. They had a really good quarter in terms of their charge-offs. In terms of overall charge-offs at 18 basis points for the quarter, that you can see on the slide provided that's a low watermark on the slide, and we would probably expect that net charge-off number to normalize a bit going forward.

Great, guys. Thank you very much. I appreciate it.

Thank you.

The next question comes from Brandon King of Truist. Please go ahead.

Hey, good morning.

Good morning.

So a follow-up on credit. Your ACL continues to creep higher, but you're seeing a lot of other banks on a percentage basis see their ACL move lower. So could you just square what the disconnect potentially is and maybe what you're seeing differently or how your CECL modeling is flowing through to the reserve?

Yes, Brandon, thank you. We did blend in the 25% downside in our Moody's modeling this quarter. We've always maintained a higher-for-longer approach when it came to interest rates, and we felt that blending in that downside was more reflective of the mindset that we've had now for the better part of the year. So the increase in the reserve is not a sign of a weakness in our portfolio. But as you consider higher-for-longer interest rates, that can put more stress on the portfolio. And at some point, that could translate into some losses, but certainly nothing that would have a material impact on the company.

Okay. Is that predicated more on short rates or the entire curve?

I think that's predicated more on the short rates.

Okay. Okay. And then in regards to mortgage, it looks like the efficiency ratio improved to that mid-50% range. Should we expect continued improvement if you have strong production quarters, I guess, in the seasonally strong quarters in the second and third quarter?

Well, I would kind of characterize it more as stabilization there. One of the things we look at is that gain on sale margin, which has continued to improve and stabilize. I don't see a lot of lift above and beyond where we are today. But as you can see, it's still a strong contributor. You do get in, as I said earlier, in the seasonality, but the operation is very efficient. And obviously, as production comes in and increases as we saw this quarter, we've already got the infrastructure in place to leverage that up. So I think in terms of our positioning, we feel very good about it. And if and when rates start to pull back and there is a refinance opportunity, we are well positioned to ride that wave and capitalize on it. But in terms of our crystal ball looking out between now and the end of the year, I think the seasonality will start kicking in between now and the end of the year, but it will still finish strong.

Okay. Thanks for taking my questions.

Thank you.

Our next question comes from Russell Gunther of Stephens. Please go ahead.

Hi. Good morning, guys.

Good morning.

First question for me was on the CRE concentration ratio. You guys pointed out that continues to move lower around 274 today. Just give us a sense, if you could, in terms of where you'd like that to shake out? Are we around a current comfort level? Or should we expect that to continue to work lower?

We will do everything we can to keep it below 300, and we're currently below that. 274 is a favorable position for us. We believe that being in the range of 250 to 300, with 274 being a solid point, works well for us.

Okay. Great. Thanks, Nicole. And then a follow-up on the margin discussion. I appreciate the commentary around securities cash flows and the impact going forward. Could you just remind us what the fixed repricing opportunity is on the loan side over the next couple of quarters?

Sure. So we've got about 37% of our loans that are repricing in the next year. And then was there a second part to that question?

It'd be helpful just to get a sense for what the potential pickup in loan yields would be versus the maturing rate?

In the next quarter, we expect about 32% to mature at 833. Following that, over the next nine months, we anticipate around $1.3 billion to mature at 724. It's important to note that included in this are our mortgage warehouse loans, which reprice every 20 days. Additionally, while our premium finance loans are fixed rate, they have an average maturity of 10 months, so many of them have already been repriced. I hope this addresses your question regarding the maturities and the repricing dynamics.

Yeah. That's great. Understood. Thank you for that. And then would it be possible to put a finer point on the strategic actions taken within fee income in terms of lost revenue on MSR servicing but the pickup in BOLI, I understand a net positive, but any additional color?

Yes, absolutely. So the MSR transaction where we took about a $4.7 million gain on the MSR and our lost revenue is just about - a little over $2 million on that for the year. And then we took the $4.7 million gain and used that to restructure the BOLI. Our BOLI, we restructured about $106 million of the BOLI. That was at a current 241 yield, and we are reinvesting that in a 450 yield, which gives us about $2.2 million of income. So they are almost a perfect match. The BOLI restructure did not come through noninterest income that came through tax. So when you're looking at the balance sheet or the income statement, the MSR sale and the Visa gain were both in noninterest income and then the - I'm sorry, the MSR and the Visa were in noninterest income, but BOLI was through the tax line. But those almost offset each other perfectly. And what we really did was swap out 250% risk-weighted assets. So we picked up some change or some regulatory capital. And then the other thing is when you look at our ALM modeling, the most volatile part of our ALM modeling was the MSR. And when a down scenario, the repricing and the early payoff of those, the valuation of those. So we've really also impacted our ALM sensitivity and got us in a down rate environment helped us out. So those are kind of the benefits being able to help the ALM modeling, help the risk-weighted assets and being able to do that with no impact to the income statement going forward.

Okay. No, that's great. Nicole, super helpful. I appreciate the clarification. And then last one for me. It did, as mentioned, Balboa trends improved on the quarter. Would you just have the dollar charge-offs this quarter and then your expectations for loss rates within that portfolio going forward?

The charge-off for Balboa in the second quarter was a little over $7 million. We have made several adjustments to the credit criteria for Balboa throughout 2023. Overall, we anticipate that charge-offs will decline compared to this year, though we don't expect this to happen in a smooth manner. Therefore, that figure may fluctuate somewhat. However, we are confident that, in the long run, charge-offs will decrease.

All right. Excellent. Thank you, guys. I appreciate it. Thanks for taking my questions.

Sure. Thank you.

The next question comes from Manuel Navas of D.A. Davidson. Please go ahead.

Can I dig into the NIM a little bit more? What are new loan yields coming on? And what is kind of like your marginal cost of deposits right now?

Sure. So our new loan production for June was about 10%. That was consistent with the previous month. So both May and June were right at around 10%. And then our deposit production for the month of June came in right at 2.2%.

Is deposit competition the right way to frame deposit costs? Perhaps the pressure on deposit costs is leveling out, but you might need more deposits if your loan growth remains strong. Is that an appropriate way to consider the situation?

That's exactly right. We are satisfied with our margin and want to maintain it, but our priority is to protect our customer base. We take pride in our deposit base as well and will ensure its protection. We have mentioned that deposit growth will dictate loan growth. Therefore, if we need to sacrifice a slight margin to expand our loan portfolio while still enhancing net interest income, that's a decision we are willing to make. Given our margin is 354 basis points above our peers, if we give up a few basis points to increase net interest income, it will ultimately benefit our earnings per share, return on assets, and efficiency through net interest income growth. So, even if we make slight concessions, we believe we can still achieve our growth objectives.

That's great. I appreciate that. Where do commercial pipeline stand now? What's the mix currently? Just kind of thinking through that, as we get closer to a rate cut, has that mix shifted at all? Any updated thoughts on kind of where loan growth is going to come from?

Sure. I believe it's important to note that in the second quarter, around 45% of our loan growth was attributed to mortgage warehouse lines. Additionally, we've mentioned a reduction in our commercial real estate concentration, partially due to payoffs. The data indicates that our commercial real estate has decreased this quarter, which we appreciate about our balance sheet is its diversification. With our Premium Finance division, Equipment Finance division, mortgage, core banking, commercial real estate, and commercial and industrial sectors, we see numerous opportunities. We anticipate that our loan growth moving forward will be diverse. We expect the mortgage warehouse lines to decline again by the end of the year, in line with typical market cycles. Overall, we believe we will achieve mid-single-digit loan growth by year-end, with diversity across various categories.

I appreciate that. Just one follow-up on mortgage banking, where the fees are really strong. The pipeline is up quarter-over-quarter. It seems like you're speaking more of stability there next quarter. And did the MSR gain run through that line? Or was it in other? Just kind of geography there. I just wanted to confirm it.

Yes. The MSR line is in other. And then we typically have second and third quarter our strongest mortgage quarter. Fourth quarter typically does decline a little bit. So that's cyclicality. And we don't have any reason to believe that normal cyclicality won't happen this year.

I appreciate that. I'll step back into the queue.

Perfect. Thank you.

The next question comes from David Feaster of Raymond James. Please go ahead.

Hey, good morning, everybody.

Good morning.

One of the most impressive things in the quarter was the NIB growth. Could you touch a bit on what's driving that? What's allowing you to be so successful and some of the trends throughout the quarter and just how you think about NIB going forward?

Yes. Our approach has remained unchanged, and we have consistently prioritized the value of deposits over the years. This commitment is evident in our incentive plans as well as our budgeting and forecasting. Currently, we are witnessing the outcomes of significant efforts in business development and treasury initiatives that have been underway since the start of the year. We've previously noted that our investments in overhead and expenses this year have largely focused on treasury. The combination of these treasury initiatives and our C&I initiatives is where we are seeing substantial growth in core funding, and we anticipate this will continue. We are very satisfied with the progress. While there were some associated expenses from marketing efforts, these have proven beneficial, as demonstrated this quarter. We are pleased with the results and hope to maintain this positive trend leading up to the year's end.

Okay. That's great. And then just wanted to touch on Balboa. We've talked about the strength that you're seeing there and tightening the credit box. Curious, maybe how do you think about the growth outlook there? And then whether there's any other opportunities in that segment as you take a higher look at it, whether there's opportunities to expand that platform? I don't know whether it's different asset classes or anything like that or even potentially drive some deposits from that group?

Yes, Balboa is a strong segment for us, particularly in equipment finance. It's a significant opportunity despite the higher losses that come with it; the yields are much better, making it a very profitable business. We've adjusted our credit criteria, which has helped address many of the transportation issues we faced. Regarding our balance sheet, I don’t anticipate significant growth beyond the current 6.7% as we've capped it internally at about 10%. However, there is still the potential to sell and securitize that paper, which could increase the volume if the market conditions support a return to loan sales and securitizations, similar to how we operated historically without a bank balance sheet. This initiative presents a promising opportunity for us going forward. As we consider potential growth, maintaining our production capabilities will allow us to increase output, provided we have the necessary channels to sell the paper.

Okay, that's really terrific...

Yes, that generates great fee income, too, as you well know.

Yes. That's terrific. And then just last one for me. You've historically had a lot of success recruiting high-quality talent. I'm curious maybe what you're seeing on the hiring front in your appetite for producers here, where you'd be looking to deepen your presence or potentially interested in market expansion, just given that you're still open for business and growing, while a lot of others are somewhat constrained right now?

Yes. Our focus has been on retaining our incredible talent rather than on attracting new hires. As we've mentioned repeatedly, we don’t need to recruit additional staff to meet our budget and expectations. While we are open to pursuing talent when it becomes available, our recent hires in treasury and C&I initiatives have proven beneficial. Currently, it’s crucial for companies to concentrate on retaining their existing talent since losing talented employees is detrimental. Therefore, we are not actively seeking to hire new teams, which helps us avoid unnecessary expenses. We are quite mindful of our spending. However, we won’t overlook any valuable opportunities that arise. Looking ahead to 2024 and 2025, I don’t anticipate a significant increase in expenses related to hiring, aside from selective situations.

Okay, that makes sense. All right, thanks everybody.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Palmer Proctor for any closing remarks.

Great. Thank you. We appreciate your participation in today's call, and we look forward to sharing our results with you next quarter. Our discipline in creating strength on the balance sheet in loans, deposits and capital as well as our core profitability and stable credit metrics has positioned us extremely well as we look into the future. We've certainly have the infrastructure in place, the markets and the talent to execute on our strategies, and we remain committed to top-of-class results. I want to thank you again for your time and interest in Ameris.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.