ABCB - NASDAQ

Hello, and welcome to today's Ameris Bancorp's Second Quarter Earnings Call. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions] I now have the pleasure of handing over to today's host, Jennifer Demba, Chief Financial Officer. Please go ahead.

Thank you, Bailey. This is actually Nicole Stokes. I think Jennifer Demba is somebody that just joined the Q&A. So -- but thank you, 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 will discuss the details of our financial results before we open up for the 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 for 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 $9.1 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. Bailey?

[Operator Instructions] The first question today comes from Brady Gailey from KBW.

So we've seen a lot of banks similar to you guys decide to portfolio more of their resi mortgage production just with the rates a little more attractive now than 6 months ago. So how do you think -- I mean, I hear you that loan growth is not going to repeat itself in the back half of the year, which makes total sense. But how do you think about the magnitude of how much resi loan production you decide to portfolio going forward?

Sure. So I'll take that. So in the second quarter, we portfolio-ed about the $515 million, and that was at a really good rate of about 4.73% rate of what we portfolio-ed. 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 manage that and how we put that on, and that kind of compares to mortgage-backed security gone that's going to be a less -- much less rate. So we kind of feel like what we did in the second quarter was kind of a onetime 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 kind of core loan growth more in that 15% range. So we really don't anticipate that again. That was kind of a onetime 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?

Sure. So a lot of that is basically [adopted] right off of 2 things. It's based on production and gain on sale. So there's 2 factors there. And so just for comparison, in the first quarter, their production was about $1.5 billion. And then in the second quarter, it was $1.7 billion of production. But again, we didn't sell all of that production in the second quarter. So -- and then the gain on sale also declined. So going forward, we still are kind of anticipating kind of that $6 billion to $7 billion of production for the year. So year-to-date, they're at about $3.3 billion of production, and we kind of see it coming in for the year at that between $6 billion to $7 billion, probably closer to the $6 billion. So I can see the third quarter being fairly consistent with second quarter, and then maybe the fourth quarter, we kind of get back into that normal cyclicality. Again, we're back up to about an 85% purchase versus refi. The biggest challenge right now is inventory for buyers and which I know we've talked about that before, but we still continue to see some of that. It has gotten a little bit better. Hope that kind of gave you the guidance that you were looking for.

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 for 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 kind of 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.

Yes, totally.

The next question today comes from the line of David Feaster from Raymond James.

Maybe just following up on the deposit side, just staying there for a second. I mean the noninterest-bearing deposit growth is really impressive at a quarter where a lot of other folks were seeing some outflows. Could you maybe talk about some of the underlying trends that you're seeing there? Any expectations for flow? And how you think your ability to continue to drive core deposit growth to fund your -- I mean, your organic growth engine is really strong. How do you think you're able to fund that? Where would you be comfortable with the loan-to-deposit ratio going?

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?

Sure. I was just going to give you a little bit of color on the DDA growth and kind of split it between the business and the consumer. And so it's interesting because there's 2 different trends there. In the business, when we look at the growth kind of from -- what we're looking at is kind of November of '19, that was after the Fidelity Ameris combination after the conversion and kind of a good clean run rate compared to where we are now. And when we see those business DDAs about 1/3 of it, its current customers that have expanded their balances with us and about 2/3 of the growth is new customers. So that kind of gives you a mix of where we're getting that growth. And obviously, our teammates are doing a fantastic job of relationship banking and continuing to grow those core deposits. And then on the consumer side, it's a little bit more mixed about 50-50. About 50% of the increase on the consumer side is just expanded relationships with current customers and about 50% is new relationships coming into the bank. So…

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 CRE.

Yes, I think you have to take it by each vertical. And as you saw in mortgage, we were up about $200 million in production this quarter versus last quarter. A lot of that was the pull forward of people trying to lock in before rates started moving too much further up on them. So there's clearly some of that going on in the mortgage portfolio. The CRE portfolio, we have certainly benefited from increased rates there. And part of it, too, is people trying to do refinancing on their existing facilities. So the demand is still strong, but what it's allowing banks to do, I think, prudently be a little more selective in what they're doing and how they're doing it. So I think the -- when we look at the pipeline, in addition to just normal production, there's still a lot of unfunded commitments that are out there as well. And so that's going to build incremental volume as we go forward, just finishing up projects that were delayed due to labor shortages and materials and supplies. So there's still -- I think most banks have a pretty robust pipeline already in place in addition to any new incremental business coming in. So I think CRE, you can be a little more selective on that and still deliver within the range of what you're trying to target. C&I, I would tell you most of the companies we're dealing with, and these are smaller middle market kind of companies. They remain very healthy. When you look at the balance sheet, still have a lot of cash they're holding on to. They're not overpurchasing in terms of inventory. But -- so the usage there is still not as much as we'd like to see. It's increasing. But I think that's got some upside as we move forward, depending on the severity of the upcoming recession. Balboa, on the other hand, has done extremely well. They've exceeded our expectations in terms of not only production but earnings and credit across the board. So I think that -- and as you know, that's got a very strong yield on it. So we anticipate seeing continued opportunity there. SBA, I think as we move, we mean the industry move forward, there's a lot more opportunity that we have there. We need to do a better job in SBA in terms of generating those loans. And I think you'll see more people portfolioing those loans just because the gain on sale premiums have come down. So I think that kind of hits all the different verticals, but happy to answer 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 [troughed] here or just thoughts on how you think about that.

Sure. As it pertains specifically to Ameris, yes, the majority of the uptick you saw on our NPAs was related to some of the government-backed mortgage loans that we have. So we’ll have to work those through the system. But in terms of incurring any types of losses, I don’t see that. This is mainly just working those through the system, as you know. So if you back those out, it’s more and more normalized. But I do think one of the things in terms of the industry, there’s a difference between normalization and then credit deterioration. And so where that fine line is, I think once we get into a more normalized environment, you don’t want people to mistake normalization for deterioration. But if you look at individual credit overall for the industry and the prudency of the underwriting, as we go forward and what we’ve done in the past and I say past, since the last cycle, -- there’s a lot more equity in deals. Specifically, the other loan that was referenced on our NPA increase, one commercial loan. That, for instance, is a very nice building in a very good location, and we’ve got a lot of optionality with that. Underwriting debt service coverage, sponsors behind deals. I think that’s going to bode well for the industry as we go forward. If we do have any sort of pullback especially [it’s came] to CRE. So I feel much better about where we are as a bank and where we are as an industry and being able to mitigate a lot of those situations. But – and depending on the severity of it, I think that when you look at where we are versus say, the last cycle, I don’t think the losses will be there. That doesn’t mean you don’t have the headache of working through credit but that’s part of we’re in the risk-taking business, so we’re going to have to work through those. But right now, as far as our outlook and that of many others, we are obviously looking very closely and are cautiously optimistic, but don’t see any cracks anywhere right now. I think, personally, more – there’s going to be more pressure on the consumers going forward than there will be on small businesses and midsize business just because their cash position, and they’ve been pretty disciplined this cycle.

The next question today comes from the line of Christopher Marinac from Janney Montgomery Scott.

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?

Sure. So we have about $1.5 billion of excess liquidity right now. So I think we will -- we definitely have enough to fund the loan growth for the next couple of quarters or at least the next 2 quarters. We have -- we've slowed -- we are still purchasing some bonds, but we have slowed that a little bit. And again, we continue to still continue to try to grow core deposits for that funding, looking to even the future past a couple of quarters. But we do have and remember, we typically have -- in the end of the third quarter, beginning of the fourth quarter, we typically have a lot of cyclical deposits that come in with some of our municipalities. So assuming that, that comes in like a normal year, we'll build some of that back up by the end of the year. So we definitely feel like we have the liquidity, but we don't anticipate as big of a push in the future is what we did this quarter between the mortgages and the portfolio, from the loan growth and then the $500 million of that bond portfolio. That's slowing a little bit, but we will continue to deploy 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.

[Operator Instructions] Next question today comes from the line of Jennifer Demba from Truist Securities.

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.

There are no further questions registered at the moment. So I'd like to pass the call back to Palmer Procter, CEO, for closing remarks.

Thank you, Bailey, and I want to once again thank everybody for joining the call today and conclude in 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 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.