Earnings Call Transcript - ABCB Q2 2023

Operator, Operator

Thank you for standing by. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome you to the Ameris Bancorp Conference Call. All lines have been placed on mute to prevent background noise. For now, I would like to hand you over to our first speaker for today, Nicole Stokes. You may now begin the conference.

Nicole Stokes, Executive

Great. Thank you, Ellie, 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 comments, and then I will 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 to our presentation. And with that, I'll turn it over to Palmer.

Palmer Proctor, CEO

Thank you, Nicole, and good morning, everyone. I appreciate you taking the time to join our call today. I'm very pleased with the second quarter financial results that we reported yesterday. I want to focus on three main things this morning: first, our core profitability; second, our improving credit metrics, including a strong allowance; and third, the strength of our diversified balance sheet. These three measures really reflect the strong quarter we had and summarize the value in our company, which creates a positive outlook we have for the future. For the second quarter, we reported net income of $62.6 million or $0.91 per diluted share. We recorded a $45.5 million provision for credit losses, where we once again prudently set aside reserves due to our economic model, specifically for forecasted future declines in commercial real estate pricing. Even with this elevated provision expense, our ROA was almost 1%, and our PPNR ROA continues to be above 2%. This is the second quarter in a row where we have a large provision expense driven by our forecast model and not related to credit deterioration in our loan portfolio. Our credit metrics improved this quarter, which is evidenced by our lower NPA ratio of just 30 basis points, excluding the Ginnie Mae's, and after the provision this quarter, our allowance for credit losses, excluding unfunded commitments, represents a healthy 133 coverage ratio and 355% of net NPAs. Our charge-offs were 28 basis points this quarter compared to 28 basis points last quarter, but we had two extraordinary items, which we've got in our slide deck on Page 21. If you exclude these two items, our charge-offs actually declined for the quarter. On the balance sheet, we said last quarter we were going to use deposit growth as a governor for our loan growth, and that's exactly what we did. Deposits grew $546 million, and loans grew $474 million. Approximately 40% or $189 million of that growth was in the mortgage warehouse lines, which we are expected to decline back down towards the end of the year. We continue to have a strong capital position in addition to having minimal impact to AOCI from our bond portfolio. Our TCE ratio improved to 8.80% at the end of the quarter. Before I turn it over to Nicole for more details on the financials, I'd like to summarize several reasons why we're confident in our future and ability to return shareholder value. It really begins with our continued focus on growing tangible book value, which is evidenced by our 8% annualized growth rate and tangible book value this quarter. Our core profitability with an above peer PPNR ROA of over 2%, a strong balance sheet with diversified earning assets in the strongest markets in the Southeast, a healthy allowance for credit losses to absorb potential economic challenges, a solid granular core deposit base with low levels of uninsured uncollateralized funding, and importantly, a prudent culture of expense control, evidenced by our 53% efficiency ratio even in the current margin environment. Last but not least, is our solid capital and liquidity position. With that, I'll turn it over to Nicole to discuss our financial results in more detail.

Nicole Stokes, Executive

Great. Thank you, Palmer. As you mentioned, for the second quarter, we're reporting net income of $62.6 million or $0.91 per diluted share. Our return on assets was 98 basis points, and our return on tangible common equity was 11.53%. These were both after the $45.5 million provision expense. So as Palmer mentioned, on a PPNR basis, we're still above 2% ROA. We ended the quarter with tangible book value of $31.42 a share. That's an increase of $0.63 or 8.2% annualized. Our tangible common equity ratio increased to 8.80% at the end of the quarter, compared to 8.55% at the end of last quarter. We continue to be well-capitalized, and we feel very comfortable with our capital and our dividend levels. We do have a share repurchase program outstanding until October 31 of this year. We repurchased about $8 million during the second quarter at an average price of $30.18, which leaves about $86.5 million left on the program. We don't necessarily anticipate aggressively purchasing in the next few months. We also redeemed about $9.5 million of our sub-debt at a discount this quarter after receiving regulatory approval to do so. On the revenue side of things, our interest income for the quarter increased $26.2 million over last quarter and $119.4 million from the second quarter of last year. In comparison, our interest expense increased $28.3 million compared to last quarter and $101.2 million compared to the second quarter of last year. Due to rising deposit costs, our net interest margin declined 16 basis points from 3.76% last quarter to a still strong 3.60% this quarter. That's exactly in line with the guidance we gave last quarter. It actually came in on the higher side of our guidance. Our yield on earning assets increased 27 basis points while our cost of interest-bearing liabilities increased 58 basis points. The contributing factors to that 16 basis point margin compression includes 19 basis points of negative deposit mix, with noninterest-bearing transitioning to interest-bearing. We had seven basis points of beta catch-up on the deposit side, and all of that was offset by 10 basis points of expansion due to the higher loan yield and average balances. Total noninterest income increased by $11.3 million, and total noninterest expense increased this quarter by $9 million, which is really explained by three categories. First, we had a decline in our deferred costs of about $2.5 million. Second, we had about $2.2 million increase in variable compensation related to the mortgage division, which was more than offset by their increased revenues. Finally, we had an increase of $3.1 million in fraud, forgery, and litigation resolution expenses. We continue to do a good job maintaining other controllable expenses. Our adjusted efficiency ratio was 53.41% this quarter. So even with the margin compression, we were within our 52% to 55% target range. On the balance sheet side, assets declined to $25.8 billion from $26.1 billion last quarter. Total loans increased $473.9 million or 9.5% annualized. We reduced excess liquidity by about $700 million by paying off $875 million of FHLB advances early this quarter. Our total deposits increased by $545.7 million during the quarter, with core deposits increasing about $187.9 million and brokered CDs increasing $357.8 million. With that, I will wrap it up by reiterating how we remain disciplined and focused on operating performance. We're optimistic about the remainder of 2023. I appreciate everyone's time today, and I'm going to turn the call back over to Ellie for questions from the group. Thank you, Ellie.

Operator, Operator

We have our first question from Eric Spector from Raymond James. Your line is now open.

Eric Spector, Analyst

Hey, good morning everybody. Congrats on a great quarter. Just dialing in for David Feaster here. I just wanted to get some more color on the funding side and some of the trends throughout the quarter and the timing of the noninterest-bearing outflows that was earlier in the quarter and whether they started to stabilize in May or June and how they're trending early here in July?

Nicole Stokes, Executive

Yes. So you're exactly right. We did see more aggressive movement early on in the quarter because remember, kind of all the noise that came in March. We certainly kind of saw that settle down. What we're starting to see is that not the big movement; I would say now we're more in the aspect of some of our larger customers refining the balances that they need in their operating account and maybe moving just a little bit of that excess. So we've certainly seen that slow, but that's really good. The 90-day question here is where does noninterest-bearing stabilize? We're still at 33% of our total deposits. They are noninterest-bearing, which is very robust. We feel like if we can continue to keep that in that 30% to 33% range, that would be a win.

Eric Spector, Analyst

Got it. I appreciate the color. And then I just wanted to get your thoughts on loan growth and where you're still seeing risk-adjusted returns and loan yields are trending? When do you expect to continue to see loan growth throughout the year and into next year? Just curious if you could provide any color from that end?

Palmer Proctor, CEO

Yes, that's a great question. A significant portion of our growth, as shown in the slide deck, comes from the increased lending in our mortgage warehouse, which reflects the seasonality of our business that we discussed last quarter. Typically, mortgage volume trends back to historical patterns, where the second and third quarters are quite strong. I anticipate a moderation in the fourth quarter. Excluding this from our production run rate would likely bring us back to a mid-single-digit growth rate by year-end, and I do not expect growth to surpass that. Regarding the yields on our portfolios, similar to what many of our peer banks are experiencing, we are seeing improved yields overall and better deposits. This disciplined approach has been in place and brings us relief considering the current deposit pressures in the market.

Eric Spector, Analyst

Got it. Thanks. And then I guess just going off of funding costs and loan growth. Obviously, margin is not an output, it's an input, but just given rapidly rising funding costs. Just curious how you think about the NII, NIM trajectory here going forward? Just assuming no more rate hikes, I don't know what you guys have in your assumptions, but just curious how you think about that NIM trajectory from here?

Nicole Stokes, Executive

We do not have any rate assumptions included in our guidance, which is based on flat rates. We have adjusted our balance sheet to be as close to neutral as possible, with about a 1% variation in that balance. The main factor affecting our margin is the composition of noninterest-bearing deposits. For us, every $100 million that shifts from noninterest-bearing accounts can lead to about a two basis point change in margin, assuming it moves into higher-rate instruments like CDs or advances. While we are satisfied with the current margin, I wouldn’t suggest we’ve reached the lowest point yet. The transition from noninterest-bearing to interest-bearing accounts, along with competitive pressures, could still create some challenges for our deposit situation. Any improvements we see from loan repricing might be offset by similar pressures on the deposit side. I believe we may still experience additional compression in margins in the coming quarters, despite what the model suggests.

Eric Spector, Analyst

Got it. I appreciate the color. And just one last question, and then I'll step back. Just on expenses, how do you think about the good core expense run rate and how you juggle these costs at this point, obviously, with NII pressures versus continued investment in the franchise? Thanks for taking the questions.

Nicole Stokes, Executive

Sure. There are definitely some things changing. While we have seen wage inflation stabilize over the last nine months, we expect some of the benefit costs to increase next year, likely more relevant to 2024 expenses. We are currently modeling this. Although we manage expenses effectively, I believe our guidance remains consistent, indicating a 3% to 5% increase in expenses for the upcoming year. Despite our expense management, factors such as higher FDIC insurance costs and health insurance will contribute to this increase, keeping us within that 3% to 5% range. This guidance excludes the variable costs of mortgage, so when we remove those, we anticipate a 3% to 5% rise in noninterest expenses.

Eric Spector, Analyst

Got it. Thank you. Congrats again on a good quarter.

Nicole Stokes, Executive

Great, thank you.

Operator, Operator

We have our next question coming from Brady Gailey from KBW. Your line is now open.

Brady Gailey, Analyst

So I heard the expense guidance for next year, but I was just wondering when you look at expenses in the second quarter, they were a little heavy. I know you called out a couple of one-timers. When you look at the back half of this year, how do you think about expenses? Could expenses take a step down in dollars in the third quarter relative to 2Q just because 2Q had a couple of one-timers?

Nicole Stokes, Executive

Yes, I'm pleased that's the message we are conveying. We did experience a few one-time events. I'm unsure about the deferred FAS 91 fee, but I believe it will persist. Regarding mortgage production, it is expected to decrease in the fourth quarter, so I anticipate the third quarter will resemble the second quarter, followed by a decline in the fourth quarter. The issues of fraud, forgery, and litigation resolution are unlikely to recur.

Brady Gailey, Analyst

I understand that you have projected an efficiency ratio of 52% to 55%. With the margin declining, as seen in the last three quarters where the efficiency ratio increased from 50% to 52% and then to 54%, it seems that, given the revenue challenges both for your company and the industry, the efficiency ratio might exceed that range in the near future. Do you think that's a possibility, or are there measures you can implement, such as cost-cutting on the expense side, to maintain it at 55% or lower?

Nicole Stokes, Executive

Yes, our target remains at 55%. Although it has increased slightly, last year, we started with a range of 52% to 55%, which was considered quite significant. The difference lies in our margin expectations, with 52% being based on what rates do and a stronger margin, while 55% is based on rates and a lower margin. Our forecast still places us within the 52% to 55% range, leaning towards the 55%. If we remove some of the one-off items from this quarter, the 53.5% adjusts closer to 53%. Therefore, our aim is to remain under 55% by the end of this year.

Brady Gailey, Analyst

Okay. And then finally for me, I mean, the reserve took another step up this quarter. It's a pretty robust level now. How do you think about continued reserve build from here? Do you think that if macro factors continue to decline a little bit, you'll see some more reserve build? Or do you feel like you really kind of front-loaded it and you're going to be happy with where it's at for the near term?

Nicole Stokes, Executive

Yes. Our 98% of our provision for this quarter is really model-driven from the CRE pricing index. We use a one-year economic forecast. I feel like until the forecast model starts showing some improvement versus declining CRE prices and until it starts showing improving economic conditions, reserve builds could continue depending upon the forecast. But again, it's all driven by that forecast. This was not qualitative factors that drove this; this was model-driven.

Operator, Operator

We have our next question from Casey Whitman from Piper Sandler. Your line is now open.

Casey Whitman, Analyst

So piggybacking on some of the earlier questions, we may not hit the bottom for the margin, but do you think that with loan growth that we may have reached an inflection point where we might see NII stabilize or start to grow from the second quarter level in the back half of the year? Or do you think that's a little too optimistic?

Nicole Stokes, Executive

I believe we should definitely see net interest income stabilizing and potentially increasing. However, a lot of this depends on the deposits. I would say that 80% of my guidance is firm due to the shift from noninterest-bearing to interest-bearing deposits. That's really the uncertain factor in this situation. If we can maintain our current mix and grow deposits accordingly, then even the margin could avoid a significant dip. So, I think we are at a low point for net interest income, with potential for growth. But again, our focus is really on the cost of deposits. We're seeing the expected improvement on the asset side, but we didn't anticipate the pressure on deposits along with the media attention. I don't think this situation is any different from what other banks are experiencing, probably.

Palmer Proctor, CEO

But the good news is, at least in most of our markets, which are heavy growth markets, is that the rate wars in terms of a lot of the specials that were offered out there, those are all maturing or expiring. That funding pressure, at least in most of our urban markets, has subsided. Most people that have moved money have already moved it. We’re hopefully getting towards the end of that era, which should benefit all of us in terms of a more relaxed deposit environment in terms of pricing.

Casey Whitman, Analyst

Yes. Okay. Good to hear. And then Palmer, can you walk us through just how you're thinking about and weighing uses of capital here now with the stock rebound?

Palmer Proctor, CEO

Yes. I think you all saw we did have buybacks this quarter, which is hard not to do when we're trading below tangible book value at the time, and it's accretive to tangible book value; obviously non-dilutive. We did have a small buyback. For us, it's about capital preservation. We're very comfortable where the dividend is. We do have the buybacks in place; that's an arrow in our quiver, but I don't anticipate any activity there this quarter. Right now, it's more about capital preservation as we go forward.

Operator, Operator

Your next question comes from Brandon King with Truist Securities. Your line is open.

Brandon King, Analyst

I wanted to get more insight into your funding strategy going forward. What is the expectation for broker deposits from here? Are you looking to kind of grow broker deposits, or do you think you can achieve more of your growth through core deposits?

Nicole Stokes, Executive

The goal and intent is absolutely to grow core deposits. You've talked about the mortgage warehouse lines and how those grew. About 40% of our loan growth was that to kind of think about that being funded by some of the broker. We are going to let deposit growth kind of be the governor on loan growth, and we are aiming for core deposit growth, not necessarily brokered. There's room if we need it from a liquidity standpoint, but the intent is to grow core deposits.

Brandon King, Analyst

Got you. So I'm just assuming mortgage warehouse is stronger again in the third quarter, we could see an uptick in brokerage, right?

Nicole Stokes, Executive

We would look at brokered or FHLB. On our balance sheet, typically, near the end of the third quarter and fourth quarter, we end up having a lot of cyclical municipal money come in. That would start to slow in the remainder of this year as well, kind of in the third quarter and fourth quarter, so that's another funding source for us.

Brandon King, Analyst

Okay. And could you also remind us for the municipal money, what sort of rates that come on the balance sheet?

Nicole Stokes, Executive

Yes. We typically are very competitive with what our current spot cost would be. So money markets in that 2.5%, 3% now that 1.50% to 1.75%, savings around 1%, so I do want to do savings. Those were kind of our spot costs at quarter-end. Assuming those stay fairly level with no change in Fed rates, we would expect those municipals to be maybe a little bit less because they are collateralized.

Brandon King, Analyst

Okay. And I'm assuming those will help potentially pay down some broker deposits. What is kind of the duration of the local deposits? What are you expecting to mature later this year?

Nicole Stokes, Executive

Yes. We have those organized in a structured way, and a specific amount is maturing each month. As we grow our core deposits, we can pay those off. It's not set up like a large lump-sum broker; we haven't staggered it from now until the end of the year to maintain our targeted ratio of around 11%.

Brandon King, Analyst

Okay. That's helpful. And then I wanted to ask about the office loan that was charged off. Could you give us a sense of how large that loan was, and what were the potential unique factors regarding that situation compared to the rest of your office portfolio?

Palmer Proctor, CEO

Okay, Brandon, the loan itself is something that we've been kind of in one part of collection or another for a little over a year. It has been something we've dealt with for a while. The original loan amount was in excess of right around the $10 million mark; a smaller property relative to maybe what you have in mind. It was an acquired loan. When we got down to the final foreclosure on it, we updated our appraisal as an empty building with a conservative approach on that, even though there was a tenant in there. At the time we did that and moved it finally into OREO, we took the write-down on it. It's something that's been, I guess the difference maker there is that the collection efforts on that started really over a year ago. It’s not really indicative of kind of where our office is overall.

Brandon King, Analyst

Okay. That's very helpful. That's all I had. Thanks for taking my questions.

Nicole Stokes, Executive

Thank you, Brandon.

Operator, Operator

We have our next question from Russell Gunther with Stephens. Your line is open.

Russell Gunther, Analyst

Hey, good morning guys. Just a quick follow-up on the loan growth discussion. I think you mentioned a mid-single-digit core target for the back half of the year. Any color you could share regarding what's going to drive that from a mix perspective?

Palmer Proctor, CEO

Yes. I think what you'll see is, obviously, the mortgage warehouse will moderate towards the end of the year, which is a big part of the growth you saw that was in excess of the mid-single-digits. It will be pretty even across the board; we're still seeing good opportunities in C&I and some owner-occupied CRE, and obviously, mortgage and some equipment finance. The growth in all those areas is going to be pretty consistent; it won't be concentrated in any one area other than as we talked about with the mortgage warehouse.

Russell Gunther, Analyst

Okay. Great. Thanks Palmer. Then switching gears, the last couple for me from a net charge-off perspective. What came out of Balboa this quarter? Was it just that the $2.3 million that was charged off or was there kind of additional losses there? As a follow-up, what's your view on the lifetime loss perspective for that portfolio?

Jon Edwards, Chief Credit Officer

Yes. The losses in the Equipment Finance division in the second quarter were almost spot on what they were in the first quarter, which was about $9.9 million. The $2.3 million was extraordinary, as Palmer mentioned earlier. That group of nonperforming loans was 100% reserved at the acquisition date. We went through collection efforts over that time and decided that those loans, the remaining balance of those loans we charged off. They didn't impact earnings in that regard. The net of that particular extraordinary item would drive the losses in the second quarter in equipment finance down. The entire portfolio is somewhat of a barometer of the business cycle. That's a little bit the reason why we've got a higher amount of charge-off run rate today than we saw last year. I don't anticipate that it will grow from this point; I think it's stable to probably trending a little bit lower going forward. It is well managed, and it was somewhat anticipated when we did due diligence back 18 months ago that we would bring on additional losses. The going-on rate for new business is a little bit sub-13%, which offsets revenue and contributes to keeping us above 2% PPNR.

Russell Gunther, Analyst

Understood. I appreciate the color there. Lastly, how are you thinking about potential net charge-off ranges for this year and next?

Palmer Proctor, CEO

That's a great question. The pre-pandemic normal, if you pull out a bit of normal for us, pre-pandemic was around 19 basis points for the five years preceding the pandemic. I think that 18 to 25 basis points is likely to be kind of the normal for us in a normal business environment. That's sort of what I would look at as a normalized rate.

Russell Gunther, Analyst

Okay. Great. That's it for me guys. Thanks for taking my question.

Nicole Stokes, Executive

Thank you.

Operator, Operator

Your next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is open.

Christopher Marinac, Analyst

Thanks. Good morning. I just want to keep on the theme of Balboa. What should the risk-adjusted losses be for that portfolio as we go forward as the charge-offs to modify a little bit as you just said, and then also as loan yields reset for the portfolio?

Palmer Proctor, CEO

That's a great question. We modeled it in the 1.5% range as the five years preceding the acquisition date. Last year, we achieved much less than that. If you take the 19 months since the acquisition in early December 2021 and take all of the losses we've had and annualize it back, it's about $180 million. When you take a longer outlook, you're probably going to see that number in a kind of 1.8% to maybe 2.2% range of fluctuation, a more normalized look, especially from what we saw in the first half of this year. Remember, the primary losses were coming out of loans secured by trucks, medium-duty trucks. A bit of strengthening there will impact the losses also.

Jon Edwards, Chief Credit Officer

Absolutely.

Palmer Proctor, CEO

Absolutely.

Christopher Marinac, Analyst

My follow-up just has to go back to the deposit base. Nicole, as deposits stabilize in terms of rates over the next few quarters, what should the average relationship be? Is it in that four to five-year category on average for all of your customer relationships? Or is it longer in some cases?

Nicole Stokes, Executive

It is longer. We actually did an analysis and interestingly, it's split almost one-third, one-third, one-third. One-third are long-time customers going back many years. About one-third is in the last five years prior to the pandemic. The other one-third is new since the pandemic. It's very granular; that’s part of why our average balance is so small, and we don't have a large, lumpy deposits. We are just very much core funded.

Palmer Proctor, CEO

You would have a 50-year-old bank to have some of that. When you look at our 10-year plus, there's a huge swap; that's about one-third of it. As Nicole said, then you have your five to 10 years as another one-third and then less than that. So it is very granular.

Christopher Marinac, Analyst

Super. Thank you for that. That's very helpful.

Nicole Stokes, Executive

Thank you.

Operator, Operator

Seeing no further questions, I will now turn the call back over to the presenters.

Palmer Proctor, CEO

Great. Thank you very much, and I'd like to thank everybody again for listening to our second-quarter earnings call. Clearly, our discipline in creating strength in the balance sheet, the loans, deposits, capital, as well as our core profitability and stable credit metrics positions us well for the future. We've got the skill set, the markets, and we certainly have the talent to execute on our strategies, and we remain committed to top-class results. Thank you again for your time and your interest in Ameris.

Operator, Operator

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