Earnings Call Transcript - ABCB Q2 2021

Operator, Operator

Good day, and welcome to the Ameris Bank Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I will now like to turn the conference over to Nicole Stokes. Please go ahead.

Nicole Stokes, Investor Relations

Great. Thank you, everyone. 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 it 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. The actual results could vary materially. We'll 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 our appendix to our presentation. And with that, I'll turn it over to Palmer for opening comments.

Palmer Proctor, CEO

Thank you, Nicole, and thank you to everyone who has joined our call today. I'm excited to share with you our second quarter results. In fact, I was actually more impressed with our team's results this quarter than the record earnings we posted in the first quarter, and here is why. One of the big questions, a very legitimate question from many of our ABCB stockholders and stakeholders, was, 'What happens when mortgage revenue normalizes for the bank?' And this quarter shows you exactly what happens when mortgage revenue moderates. This quarter reflects purposeful and deliberate actions that Ameris' teammates have taken to reduce expenses associated with the decline of mortgage revenue. It's also very reflective of the investments we've made in top talent and many of our other core lending areas of the company. Additionally, it reflects the meaningful pipeline of relationships we continue to build, which resulted in really strong second quarter results as we are reporting net income of $88 million, or $0.25 per diluted share on an adjusted basis. This represents a 1.63 return on average assets and a 19.46 return on tangible equity. Our adjusted efficiency ratio actually improved from the first quarter, from 54.62% to 54.07%. As you may recall, we reversed $28.6 million of provision for loan loss expense last quarter, and this quarter, we had just a minimal provision expense due to the positive loan growth we'll discuss. Speaking of loan growth, it was incredible. Looking at our annualized net loan growth, it was right at 5% for the quarter, net of PPP and our indirect runoff, and we still expect to deliver mid to upper-single-digit loan growth for the year as we look at our pipelines and the opportunities in all of our growth markets. The area I was most excited about was the $100 million of growth we had in C&I, and you'll be able to see this on our slide deck, on page 16. Nicole is going to discuss the excess liquidity and the impact on our margin in more detail in a few minutes. But I did want to mention the continued deposit growth for this quarter too. Our growth in non-interest-bearing deposits continued to outpace the growth of total deposits, and they're now approaching 40% of total deposits, which is very impressive. I emphasize this because when rates start moving back up and some of the excess liquidity runs off, you're going to find out who the real leaders are in our industry, in terms of who took the opportunity to grow core funding during this time. We'll certainly be a standout there. On the capital side of the balance sheet, our capital position remains strong. We've consistently said we're focused on growing tangible book, and we saw growth in both TCE and tangible book value this quarter. We grew tangible book value by $1.18 per share or 4.7% during the second quarter. We've also grown tangible value by $2.76 or over 11% for the year so far. This equates to over 20% annualized growth for tangible book value. Our TCE ratio increased to 8.83%, which is very close to our 9% goal. If you exclude the $2.5 billion of excess liquidity on our balance sheet, the TCE ratio would have been over 10%. We clearly have the capital to support our growth initiatives and to consider opportunistic transactions as we go forward. Jon Edwards, our Chief Credit Officer, is with us today and is available to take questions after our prepared remarks. I wanted to hit a few highlights in terms of credit. Our non-performing assets as a percent of total assets improved to 32 basis points, compared to 40 basis points last quarter and 59 basis points last year. Loans that remain on deferral at the end of the quarter were approximately 1.2% of total loans, down from approximately 19% of total loans this time last year. Our allowance coverage ratio, excluding the unfunded commitments, was 1.23% net of our PPP loans at the end of the quarter. Now, in terms of COVID, a quick update: July 6 was our official back-to-the-office date. All of our branches are open, and all of our staff, including support and administrative staffs, are back in the office. Some of that is in a new hybrid approach, but we're adapting well and our teams are really excited to have a new sense of normalcy. As I mentioned last quarter, most businesses are back open. Traffic jams are back to normal and in restaurants wait times, and new restaurants are actually opening. So, things are definitely getting back to normal in the Southeast, and we certainly expect to benefit from that. A quick update on PPP: we continue to see forgiveness in round one during the quarter, and we started receiving forgiveness funds on round two in June. We've got approximately $126 million left of the $1.1 billion that we loaned out in round one, and we have about $362 million left of the $409 million from round two. There's about $22 million of deferred revenue remaining on PPP for us. And one last comment I wanted to make: I'm very proud to announce that we published our first Corporate Social Responsibility Report in May, which was in accordance with the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures. A shout-out to our entire team for the hard work that went into this report. I'm really pleased with how it came out, and I hope you all take a minute to look at it. But I'll stop here and turn it over to Nicole to discuss our financial results in more detail.

Nicole Stokes, Investor Relations

Great. Thank you, Palmer. For the second quarter, we're reporting net income of $88.3 million or $1.27 per diluted share. On an adjusted basis, we earned $87.5 million or $1.25 per diluted share, excluding the small recovery on the servicing asset impairment and a gain on the sale of premises this quarter. We're pleased with our operating ratios; our adjusted ROA in the second quarter was 1.63, and for the year, it's 1.94. Our adjusted return on tangible common equity was 19.46 for the quarter and 23.41 for the year-to-date. As Palmer mentioned, our tangible book value increased by $1.80 or 4.7% from 25.27% to 26.45% during the quarter. Year-over-year, tangible book value has increased by $5.55 or 26.6% from this time last year. In addition, our tangible common equity ratio increased 21 basis points this quarter to 8.83 from 8.62 at the end of the first quarter. It has increased 113 basis points over the past year from 7.70 this time last year. The approximate $2.5 billion of excess liquidity on our balance sheet negatively impacted this ratio by 120 basis points. Excluding net cash from total assets, our TCE ratio would have been approximately 10.03% at quarter end, which is well above our stated target of 9%. We continue to be well-capitalized and feel comfortable with our capital and dividend level. Talking a little bit about margin, our net interest margin declined 23 basis points from 3.57% to 3.34% during the quarter. Our yield on earning assets declined by 27 basis points, while our total funding costs decreased four basis points. We detailed this on Slide 8; you can see the 27 basis point decline was attributable to several unusual factors. We had eight basis points of compression from the $4 million decline in PPP income, five basis points from the near $1.7 million of accretion income decline, five basis points were a bump last quarter related to the sale of a consumer portfolio, and four basis points were due to the continued growth in excess liquidity. Lastly, five final basis points were due to loan yield compression: two basis points in mortgage, one basis point for held for sale, and two basis points for true commercial bank loan yield compression. My point here is that true loan yield compression was really five basis points and we had four basis points of funding costs during the quarter. Also added to Slide 8, you can see the impact that $2.5 billion of excess liquidity had on our margin, which accounts for 36 basis points of the total negative margin compression from a year ago. We're focused on our deposit costs and we continue to grind them down. We still have some room for improvement in the CD portfolio. The real driver to an improving margin going forward is putting that excess liquidity to work, which we anticipate occurring over the next three quarters. As Palmer also mentioned, we had a small provision for loan loss expense of about $142,000 compared to that $28.6 million reversal last quarter. The continued economic conditions, specifically unemployment, GDP, and CRE index as well as our improved credit quality this quarter, helped offset the need for additional provisions due to our loan growth. Our ending allowance for loan loss was $175.1 million, compared to $178.6 million at the end of last quarter and $208.8 million at the end of the second quarter last year, which was during the pandemic with heightened deferrals. Including the unfunded commitment reserve and allowance for credit losses, our total allowance was $197.8 million at quarter-end, compared with $200.2 million at the end of last quarter. Moving on to non-interest income, as expected, our non-interest income declined this quarter due to decreases in mortgage banking. Excluding the $9.7 million recovery last quarter and the $749,000 recovery this quarter, our mortgage income declined about $19.3 million. There are two factors contributing to this decline in revenue: production and gain on sale margin. We've added a new Slide 11 with some information on mortgage. As you can see, production in the Retail Mortgage Group declined 9% to $2.4 billion this quarter from $2.6 billion last quarter. It's important to note here that total non-interest expense also declined 9% or $5.6 million in the Retail Mortgage division. In addition to those reductions in variable costs, we also saw an average gain on sale decrease back to normal levels, declining to 2.77 compared to the elevated 3.95 last quarter. We don't anticipate further decline in the gain on sale margin. The open pipeline at the end of the second quarter was $1.7 billion, compared to $2.3 billion at the end of last quarter. We believe there is further reduction in non-interest expense if production continues to decline. As we previously stated, a large amount of our expenses are variable costs, which we designed in our mortgage group. Total non-interest expense for the company declined by $13 million from $148.8 million last quarter to $135.8 million this quarter, with mortgage expenses declining almost $6 million during the quarter, alongside an additional $6.5 million reduction in the banking division, which includes the enterprise wide service and support staff. We continue to look for ways to become more efficient, continuously monitoring the efficiency ratio by division. Our adjusted efficiency ratio improved slightly this quarter to 54.07% from 54.62% last quarter. I previously guided for the efficiency ratio to stabilize in the 53% to 55% range because we did not anticipate the previous level of mortgage revenue and efficiency to be sustainable. Thus, I think 54.07% is right in the middle of that range as we saw mortgage stabilize. Additionally, we witnessed the gain on sale margin, returning to normal levels, and still saw improvement in our efficiency ratio. On the balance sheet side, we ended the quarter with assets of $21.9 billion compared to $21.4 billion at the end of last quarter. We were pleased with our organic loan growth of $181 million or 5% annualized for the second quarter. As shown on slide 16, we faced $473 million of headwinds against a $655 million growth in CRE, C&I, premium finance, and residential. PPP loans declined by $304 million and indirect loans declined by $85 million. We have approximately $488 million of PPP loans left, and we have $397 million of indirect loans left. Anticipating headwinds from runoff in both portfolios to subside early next year. With respect to PPP, we received payments and forgiveness of approximately $975 million on round one, leaving the outstanding balance at $126 million while the new round-two balance stands at $362 million. The average balance of PPP loans in the second quarter was $708.5 million compared to an average balance of $764.9 million in the first quarter. We have about $22.3 million left in deferred income on the PPP loan: $2.2 million on round one, and $20.1 million on round two. Again, we anticipate amortizing that into income over the next year, if not sooner. We discussed the excess liquidity due to the tremendous deposit growth we’ve seen in the past few quarters. This quarter, we grew $382 million in deposits, with 46% of that growth in non-interest-bearing deposits. While I sound like a broken record, we anticipate some deposit runoff as life gets back to normal post-pandemic, and as rates potentially rise. We continue to anticipate net loan growth, net of PPP activity for the year, in the mid-single digits, which is about $1 billion of loan growth. That leaves about $1.5 billion of excess cash to prepare for deposit runoff if rates start to increase and to begin buying investments in the bond portfolio. We purchased $100 million of BOLI during the second quarter with a non-taxable yield of approximately 3.5% and are considering other investment purchases, although we would like the curve to steepen a bit before we pursue further. With that, I will wrap it up. I appreciate everyone's time today, and I'll turn the call over to Wise for any questions from the group.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey, Analyst

Hey, thanks. Good morning, guys.

Nicole Stokes, Investor Relations

Good morning, Brady.

Brady Gailey, Analyst

So, when I look at what happened on the expense side, your ability to reduce expenses to help offset the pressure of down revenue, mostly down mortgage, was impressive in the second quarter. Should that dynamic continue to play out going forward, as mortgage continues to normalize?

Nicole Stokes, Investor Relations

So, Brady, I'm going to take that question and split it into two. I'll discuss the mortgage side and the banking side because there are two different dynamics. On the mortgage side, we anticipate that, looking at mortgage revenue, there are two components: one is driven by gain on sale, and the other component is production. The gain on sale margin doesn't affect those variable costs, and we feel like we've absorbed that into the second quarter. On the production side, the variable costs really are affected. We have about an 80% structure there. As production continues to decline, we expect additional cost savings on the expense side, particularly in salary benefits, commissions, incentives, and IT costs. These are the two main categories that drive the decline in expenses as production revenue drops. Therefore, I do anticipate seeing similar trends on the mortgage side, while on the banking side, part of the decrease this quarter result was due to deferred costs from our strong production.

Brady Gailey, Analyst

Okay. And regarding your capital base, you mentioned that adjusted TCE is 10%, which is 100 basis points above your 9% target. Your stock has pulled back a little; it's at 11 times earnings and 1.7 times tangible, which is pretty attractive. Any thoughts on reengaging in the share buyback?

Palmer Proctor, CEO

Yes, Brady, this is Palmer. As you know, we have a plan out there and authorized. We've got opportunities to do that. If we continue to see the pullback that we're seeing now, because the stock is at a very attractive price, that's certainly a consideration we'll take into account.

Brady Gailey, Analyst

Okay. Finally, an update on M&A: we saw SouthState enter your market in a big way with the acquisition of Atlantic Capital. Would a target like that possibly have been of interest to you? And just generally, how are you approaching M&A, Palmer?

Palmer Proctor, CEO

Yes, I think that's a nice transaction for SouthState. It's a good bolt-on for them as they garner market share in a market like Atlanta. The opportunity here, especially in terms of growth prospects, is significant. We will continue to capitalize on that. We remain very disciplined and principled in our approach to M&A, considering social factors and pricing. We're positioned to think opportunistically while also having incredible organic growth opportunities.

Brady Gailey, Analyst

Okay, great. Thanks for the insights, guys.

Palmer Proctor, CEO

You bet.

Nicole Stokes, Investor Relations

Thanks, Brady.

Operator, Operator

The next question comes from Casey Whitman with Piper Sandler. Please go ahead.

Casey Whitman, Analyst

Good morning.

Nicole Stokes, Investor Relations

Good morning, Casey.

Casey Whitman, Analyst

Well, Nicole, can you walk us through how you are thinking about your core margin over the back half of the year, outside of PPP and accretion? And how is liquidity going to play into that?

Nicole Stokes, Investor Relations

Absolutely. Assuming flat PPP, flat accretion, and flat liquidity, we guide for another quarter of mid single-digit compression, which is a couple basis points on the asset side. We do believe we can squeeze a couple more basis points on the deposit side, mostly in that CD portfolio. Thus, mid single-digit compression is expected for the next quarter until we stabilize. We have $2.5 billion of excess liquidity, and as we begin deploying that, every $100 million is about two basis points on our margin. Therefore, as soon as we start deploying that, we will see an improvement on our margin. But assuming flat conditions, we expect mid single-digit compression for another quarter.

Casey Whitman, Analyst

Okay, that makes sense. Thanks for the solid quarter.

Palmer Proctor, CEO

Great, thank you.

Nicole Stokes, Investor Relations

Thank you, Casey.

Operator, Operator

The next question comes from Jennifer Demba with Truist Securities. Please go ahead.

Jennifer Demba, Analyst

Hi. Can you hear me now?

Nicole Stokes, Investor Relations

Yes. Good morning, Jennifer.

Jennifer Demba, Analyst

Hi. How are you? My question is on the mortgage business. Could you talk about what kind of production trends you expect over the next couple of quarters and how much of an issue is the inventory shortage right now?

Palmer Proctor, CEO

Yes, I'll take that. I think our current production is still very meaningful. While we're impacted by margin, the demand is still there despite a supply shortage. Typically, we see a lot of seasonality for the second half of the year, but I don't think that's going to be the case this time. I believe our run rate going forward will be more stable than historically seen due to constant demand for inventory and absorption, particularly for purchase-type activity, where we focus. We've seen a bit of a pickup in refinancing activity due to the drop in rates last quarter. However, I foresee a much more stable mortgage environment for us moving forward.

Jennifer Demba, Analyst

Okay. Back on the merger interest topic, Palmer, could you provide more detail on what types of transactions Ameris might find interesting if they make sense?

Palmer Proctor, CEO

Yes, we’re looking at transactions that make sense and align culturally with us. It needs to be accretive as well. We're very disciplined in our pricing; we will not do anything overly dilutive to our company or our shareholders. First and foremost, it must be a good cultural fit. We're remaining opportunistic on all opportunities in both bank and non-bank transactions.

Jennifer Demba, Analyst

Okay. Thank you.

Palmer Proctor, CEO

You bet.

Operator, Operator

The next question comes from Brody Preston with Stephens Inc. Please go ahead.

Brody Preston, Analyst

Hey, good morning, everyone.

Nicole Stokes, Investor Relations

Good morning, Brody.

Brody Preston, Analyst

Nicole, can you assist me with the core expenses? I see that you're looking at increasing expenses back up to $79 million or $80 million as production increases. However, you're down from $83 million in the year-ago quarter to $76 million this quarter—essentially, you've eliminated $7 million from your quarterly run rate. Can you assist me in understanding this significant reduction while actively hiring?

Nicole Stokes, Investor Relations

Sure, that's a great question. This really comes back to what we've been saying for several quarters. We did our branch recommendations and closed down unproductive branches while assessing lease opportunities. This has been executed as planned. Even as we’ve been hiring, we've also experienced some attrition or retirements and reallocated resources for focus areas. We have utilized technology as well to achieve expense reductions. Overall, most expense categories have declined—data processing and telecommunications are the exceptions. So, while expenses were down, we’ve continued to enhance efficiencies and reduce overhead.

Palmer Proctor, CEO

Brody, this is Palmer. A significant expense for all companies is personnel and overhead. With discipline and accountability in our team, we’ve managed to maintain a high-performing group without adding unnecessary costs. In the Commercial Banking Group, for example, we hired 11 new individuals but experienced only a net increase of three FTEs. This accountability across the company is what drives positive results and positions us to grow without bloating our expenses.

Brody Preston, Analyst

I see. And regarding the mortgage side, Nicole, if 80% of the expense there is tied to variable compensation, would a 5% drop in production suggest expenses drop by 4%? Is that how we should envision that?

Nicole Stokes, Investor Relations

Exactly, yes.

Brody Preston, Analyst

Great. Thank you for that. Additionally, concerning core loan yields, I believe backing out PPP, our core loan yield stands around 4.25% this quarter, a decline of about 10 basis points. Given that new production yields continue to decrease by five to six basis points per quarter, should we expect a similar decrease in core loan yields over the next couple of quarters? When do you see stabilization?

Nicole Stokes, Investor Relations

You're right; our current trends push our loan yields down and we need about a 50 basis point upswing to stabilize. If rates remain fixed for a while, we could continue to see compression. The deposit side helps, but a 50 basis point shift is necessary to prevent further margin decline and anything above that will start to be accretive.

Brody Preston, Analyst

Okay. And regarding the HFS portfolio, is the 2.77 yield a good normalized yield to anticipate? I understand it tends to be variable.

Nicole Stokes, Investor Relations

Yes, it is variable. I expect it to remain stable and don't anticipate further declines, making it a conservative estimate.

Brody Preston, Analyst

Got it. Regarding the mortgage banking division once more, how does variability appear quarter to quarter regarding the provision line item? What drives that—it relates to the average loan in the HFS portfolio?

Nicole Stokes, Investor Relations

The provision relates to how we allocate based on internal credit metrics like deferrals and delinquencies. Additionally, we evaluate overarching economic factors that may shift allocations between business lines. If you look at last quarter, that $4.5 million tied to the $28 million company-wide release included allocations to mortgage, while this quarter's credit impact was spread across banking.

Brody Preston, Analyst

Okay. The C&I portfolio saw strength this quarter, up about 12.5% linked quarter. Could you clarify what's driving that—new commitments, increased line utilization from hires you’ve made?

Palmer Proctor, CEO

Yes, it’s a bit of all the above, which is exciting. Our investments in growth markets like Charlotte and North Florida paid off tremendously this quarter. The pipelines are full and most of the growth came from new business. That, combined with our current positions in the market, positions us well moving ahead.

Brody Preston, Analyst

Great, and finally, Nicole, could you share what servicing income was this quarter? It was $10.1 million last quarter for the mortgage?

Nicole Stokes, Investor Relations

Yes, it was consistent with that.

Palmer Proctor, CEO

That's an essential point for everyone listening today. Mortgage may experience volatility, yet servicing income tends to remain stable. This serves as a solid foundation for forecasting and budgeting within the mortgage business.

Brody Preston, Analyst

Great! Thank you all for your insights. I appreciate it.

Nicole Stokes, Investor Relations

Thank you, Brody.

Operator, Operator

The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.

Christopher Marinac, Analyst

Thanks, good morning. Palmer and Nicole, you've gained business from other bank mergers for a long time. I'm curious what makes customers move or existing customers do more business with Ameris when such changes occur?

Palmer Proctor, CEO

In disruption, typical behavior includes clients banking with individuals, especially when an account officer departs a bank. We've capitalized on disruptions, as we have a strong presence in crucial growth markets. Changes in reporting lines or credit approvals can hinder service and lead to customer disruption, which provides us with opportunities during times of M&A activity.

Christopher Marinac, Analyst

Is it fair to say that increased hiring is likely among your core lending groups across the bank?

Palmer Proctor, CEO

Yes, there are new opportunities arising, primarily as we establish ourselves in new markets, especially in the Carolinas and Florida. We are equipped with sufficient personnel to achieve our growth forecasts for the remainder of the year.

Christopher Marinac, Analyst

Lastly, regarding how fintech is evolving for Ameris, what priorities or new initiatives should we expect in the next couple of quarters?

Palmer Proctor, CEO

We aim to stay cutting-edge, heavily involved in fintech initiatives. We're exploring advancements within robotics for efficiency, particularly in high-volume areas like mortgage, while also getting into CRM technologies like Salesforce to improve workflow. We’re prioritizing where efficiency gains can be maximized as we navigate our current growth trajectory, while remaining cautious about the broader tech integration into our core systems.

Christopher Marinac, Analyst

Thanks for the thorough background!

Palmer Proctor, CEO

Absolutely!

Nicole Stokes, Investor Relations

Yes, we always discuss mortgages and how to scale our business. Proper execution is critical. Our current robotics systems allowed us to promptly reduce expenses without disrupting our back-office operations. This is an example of how technology can generate significant efficiencies.

Christopher Marinac, Analyst

Great, thanks!

Operator, Operator

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

Palmer Proctor, CEO

Thank you, everyone. Thank you for listening to our second quarter 2021 earnings call. We're excited about the momentum across our footprint, and we feel extremely well-positioned for the second half of 2021 and into the future. We will continue delivering top quartile financial results while remaining focused on disciplined growth and operational efficiency.

Operator, Operator

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