Q2 2022 Ameris Bancorp Earnings Call
Hello, and welcome to today's <unk> second quarter earnings call. My name is Bailey and I'll be the moderator for today's call.
During today's call. We will have a question and answer session and if you would like to register interest to ask a question. Please press star followed by one if for any reason you would like to attract a question. Please press star followed by two.
I now have the pleasure of hunting over to todays host Jennifer timber Chief Financial Officer. Please go ahead.
Thank you Barry this is actually Nicole I think Jennifer Gunther.
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 <unk> Dot 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 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 a 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.
Really pleased with the second quarter financial results, we reported yesterday.
And as mentioned in the press release the success, we had this quarter. It goes back to just purely solid 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 its 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 $91 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.
These adjusted results represented a $1 40 return on average assets and a 17 point.
One eight return on tangible equity during.
During the quarter. We grew total interest income to over $200 million and this is the first time, we've done that in 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 366% as we maintained funding costs and continue to grow our noninterest.
Bearing deposits on.
On the asset side of the balance sheet, we deployed approximately $1 $5 billion or excess liquidity this quarter by investing approximately 500 million and our bond portfolio and then organically growing loans about $1 4 billion during the quarter we.
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% 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 mers and this quarter, we successfully increased tangible book value by $1 five per share or over 15% annualized actually our tangible book value now is higher than where it was when we purchased Balboa capital just three quarters ago, which is pretty.
Presses in terms of operating efficiency, our adjusted efficiency ratio improved to 53, 6% this quarter from $56 nine 5% 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 record a $50 million provision in the second quarter due to the strong loan growth and updated economic forecast our annualized net charge off ratio was four basis points of total loans compared to nine basis points last quarter, and our nonperforming assets as a percentage of total assets was 56 basis points.
We remain really cautiously optimistic as we navigate through the present 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 it over to coal to discuss the financial results in more detail great. Thank you Palmer.
As you mentioned for the second quarter, we reported net income of $19 1 million or $1 30 per diluted share.
Adjusted basis, we earned <unk> 81, and a half million dollars or $1 18 per diluted share when you actually the servicing asset recovery and the gain on sale of bank premises.
Adjusted return on assets was 140, <unk> 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 a dollar five 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 three quarters ago and also this quarter. We had only 16 sensitive duration from the increase in unrealized losses on the bond portfolio compared to 25 cents of LCI duration last quarter.
Our tangible common equity ratio increased to 858 at the end of the quarter compared to 832 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.
And 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 374000, this quarter compared to last quarter and actually decreased 695000 compared to <unk>.
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 P. P. P revenue in the SBA Division.
At Palmer mentioned, we were pleased with our net interest margin as it increased 31 basis points from 335 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 one basis point.
26 basis points of the margin improvement was from the deployment of excess liquidity into higher earning assets and about five basis points with 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 zero deposit data 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 deployed about $1 billion of excess liquidity into higher earning assets to include about $500 million in the bond portfolio.
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 run off 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 grades 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 weird, it's a mix within those deposit 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, we'll just round that 42% of our total deposits.
We continue to be asset sensitive with NII, increasing about three and three 8% and an F 100 environment. We've updated the interest rate sensitivity information to our presentation you can see that on slide 11.
Moving onto noninterest income that decreased about $3 1 million in this quarter, we recorded a $10 8 million servicing rights recoveries compared to $9 seven a 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 five 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 465 compared to $1 5 billion and $3 66 last quarter.
Purchase business has returned closer to historic levels at 84% of total activity and hasn't really prepared for the continued slowdown in refinance.
Retail mortgage originations as a percentage of our pre provision pre tax income continue to decline representing a balanced contribution of about eight 5%.
The average gain on sale declined to $2 36, this quarter, but we believe it will increase back to a more normal level around that 275 range going forward.
And I think I may have saved the best for last our adjusted efficiency ratio improved to $53 66, a 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 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 how we remain disciplined and focus 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 daily for any questions from the group daily.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad. If you are using a speakerphone. Please remember to pick up your handset before asking your question.
The first question today comes from Brady Gailey from K B W. Please go on line.
Your line is now open.
Hey, Thanks, good morning, guys.
Yeah.
So we've seen a lot of bags similar to you guys decide to either portfolio more of their rugby mortgage production.
Just with the rates a little more attractive now.
Six months ago. So how 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 rescue loan production you decided the portfolio going forward.
Sure. So I'll take that so in this in the second quarter, we portfolio at about the $515 million and that was at a really good rate. It was about 473 rate of what we portfolio and about half of that was variable and half of it was fixed as far as arms versus fixed rate production. So we were you know we were purposeful with how we how we manage.
And how we put that on them and that kind of compares to what you know mortgage backed security gone, but its going to be a less much less right. So we kind of feel like what we did in the second quarter was a kind of a one time event and we don't anticipate doing that again and that's really why we kind of kind of drew out in the lines of how we look at our our loan growth this quarter they kind of.
So what we would consider kind of core loan growth more in that 15% range. So we'd really don't anticipate.
That again that was kind of a onetime remix of the portfolio and using some of that excess liquidity.
Okay, Alright, 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 maybe I mean, it sounds like you guys are expecting gain on sale.
To come back up from the second quarter level, but maybe production flows how do you think about the forecast of mortgage banking fees.
Sure. So a lot of that is basically exactly right off of two things, it's based on production and gain on sale. So there's two factors there and so I'm 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 six to 7 billion of production for the year. So year to date, we were 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 six so I can see the third quarter beat.
And fairly consistent with second quarter.
And then maybe this is the fourth quarter, we've kind of get back into that normal cyclicality again, we're back up to about an 85% purchase versus refi them. The biggest the biggest challenge right now is inventory.
For buyers and the trend that we've talked about that before but we still continue to see some of that it has gotten a little bit better how's that kind of gave you the guidance that you're looking for.
Yeah, Yeah, that's helpful and then.
Finally for me I mean, you'll have you all did a great job in the second quarter of holding.
Oh, the cost basically flat.
So I don't know, it's not going to be like that for forever, but you just remind us how you're thinking about.
What deposit betas could look like prime are sort of the next year or so.
Sure and so we have based on kind of an 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 on deposit the deposit rates in the third quarter will definitely be higher than what they were in the second quarter.
But we are we are targeting about a 23% beta and that's about a 55 in the money market 'twenty and now intend in savings. So that is our target and as long as we're trying to stay within that and that's what we have modeled into our alco modeling as well.
And 23%, that's total deposit beta or just interest bearing.
That total deposit beta that.
At 42% noninterest bearing certainly helped helped bring that average down.
Yeah totally.
Awesome. Thanks, so much guys.
Thank you Brian .
Thank you.
The next question today comes from the line of David Feaster from Raymond James. Please go ahead. Your line is now open.
Hey, good morning, everybody.
Good morning.
Maybe just following up on the deposit side I'll, just say in there for a second I mean, the noninterest bearing deposit growth is really impressive in a quarter, where a lot of other folks where we're seeing some outflows.
Could you maybe talk about some of the underlying trends.
What youre 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 engines 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 the cold finish up but I will tell you David that the.
The value we've seen in the diversification portfolio and growing, especially the CNI side of it is really where youre seeing a lot of that noninterest.
Deposit growth and so there are good core relationship deposits.
I think you're fooling yourself you don't think there is probably going be some run off 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 the.
Certainty out in the market.
There will be some folks chasing rate 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 money market or savings account, but we feel good about the base I think liquidity as we look forward into this whatever your outlook maybe between now and the next couple of years I think that's the name of the game and so we remain heavily focused even during the pandemic when deposits are just flowing in across the.
Industry on focus on the relationship side of that so I think we will continue with the efforts on the CNI side, which will 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 deposit, 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 it and it feels like I was just can give you a little bit of cover color on that on the DDA growth and kind of split it between the business and the consumer and so it's interesting because there's two different trends there in the business. When we look at Nic was.
Kind of from where we're looking at is kind of November of 19 that was after the fidelity of mirrors combination after the conversion and kind of a good clean run rate.
Compared to where we are now and when we see those business D. D. As about a third of it is current customers that expanded their balances with us and about two thirds of the growth is new customers. So it 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 deposit and then on the consumer side, it's a little bit more mixed about 50 50 about 50% of the increase on the compete 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. Thank you and then maybe just switching back to the loan growth side, just wanted to get a pulse on the market. 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 in weather higher new loan yields may start slowing originations.
And as you push higher rates, especially on CRE.
Yeah, I think you have to take each vertical and as you saw in mortgage we were up about 200 million in production this quarter versus last quarter and 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 CEA.
Our <unk> portfolio, we have certainly benefited from increased rates there and part of it too is 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 it'd be a little more selective in what theyre doing.
And how they're doing it so I think the when we look at the pipeline. In addition to just normal production there is still a lot of.
Unfunded commitments that are out there as well and so that's kind of built incremental volume as we go forward just finishing up projects that were delayed due to labor shortages in materials and supplies. So there's still I think most banks have a pretty robust pipeline already in place in addition to it.
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.
They remain very healthy when you look at the balance sheet still have a lot of cash.
They're holding onto a they're not over purchasing in terms of inventory, but so the usage there is still not as much as we'd like to see is increasing but.
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 those kind of very strong yield on it. So we anticipate seeing continued opportunities there.
SBA I think as we move we'd be in 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 portfolio in those loans just because the gain on sale premiums had come down so.
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 you'd touched on.
You know the severity of the.
Pending recession, just curious your thoughts on asset quality, maybe more broadly I mean, we had an uptick in non accruals it looks like its mortgage driven gist.
Just curious any commentary on that and then broader thoughts on 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 trough here or just thoughts on how you think about that.
Sure as it pertains specifically to the mirrors the majority of the uptick you saw in our M. P. As was related to some of the government back.
Mortgage loans that we have so we will have to work those through the system, but it terms of incurring any types of losses I don't 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 normalized but I do think one of the things in terms of the industry.
Theres 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 credits 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 pass the last since the last cycle, there's a lot more equity in deals.
Specifically the 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 kind of bode well for the for the industry. As we go forward. If we do have any sort of pullback, especially as it relates 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 cars.
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 either that doesn't mean, you don't have the headache of working through credits.
But that's part of it you know we're in the risk taking business. So we're gonna 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 any cracks anywhere right now.
I think personally mortgage is going to be more pressure on consumers going forward. Then there will be on small businesses and midsize business, just because of their cash position and.
They've been pretty disciplined this cycle.
That's great that's very helpful. Thank you.
Thank you.
The next question today comes from the line of Christopher Merrimack from Janney Montgomery Scott. Please go ahead. Your line is now open.
Thanks, Good morning, Palmer, Nicole I wanted 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 one $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 quarters or at least the next two quarters.
We have slowed we are still purchasing some bonds that we have played out a little bit and again, we continue to still continue to try to grow core deposits for that funding looking to even the future path of couple of quarters, but we do have to remember we typically have in the air at the end of the third quarter beginning of the fourth quarter. We typically have a lot of cyclical deposits that come in with me.
This capacity so I'm, 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 the mortgages in the portfolio and the loan growth and then the 500 million at that bond portfolio that's slowing.
Little bit, but we will continue to deploy it.
Great and on the municipal deposits does any of that get re cast in terms of repriced and does that at all but by high beta issue that you just have to work with.
It's really not so those are our 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 and fourth quarter or 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.
That's been in our DNA for a while so there's no doubt that.
It really doesn't built in and it doesn't affect our betas too terribly that's already built into our.
That was it.
Okay, great. Thanks for that and then Palmer what is your thought about new hiring trends on what youre seeing whether its on the commercial side or in the mortgage business.
I think today at least at least for us and for Amyris.
I'll be a little more surgical in tactical in terms of what we're looking for in the way of talent.
We have got as you know.
Wonderful team already in place in mortgage, but we will look for opportunities and be opportunistic but at the same time.
And you saw this quarter, we're cognizant of the expense side of things to the volumes. There are great. If it's not then you need to make adjustments but.
I think selected 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 it will probably be like I said, a little more surgical in our approach going forward.
Sounds good thank you for taking my questions.
Okay. Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
Our next question today comes from the line of Jennifer <unk> from <unk> Securities. Please go ahead.
Thanks, Good morning.
Good morning morning.
Question.
Nicole you said you thought you would 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 near just 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 this reallocation of resources that we've talked about for so long, but we do we do anticipate that there could be some increases I can spend the extra million.
On advertising.
Last quarter and then.
Wage inflation and wage.
Some benefit costs that are going up things like that but again, we're trying to manage that and still keep our efficiency ratio in that 50% to 55% I just with.
With guiding that there may be some slight increase but I don't think it can be anything.
Tremendous by any means.
Okay.
And then second question was margin.
And then what are.
June margins so the month of June .
Look 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 of the third month.
Okay, great and if I can ask one more question Palmer can you just talk about what you're hearing from 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.
Yeah, I would I would echo the same sentiment than and.
All the calls all of them going out on calls with.
Our team there is still a lot of.
I called I'd say, they're cautiously optimistic and then there are a lot of people trying to be opportunistic.
In terms of what depending 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 are 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 pipelines themselves.
They're very robust and remained robust, but what allows banks to do at this time and 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.
There's obviously a lot of negative sentiment that we all hear and see each and every day on the news and media but.
Contrary to that.
In terms of just operating and our operators there still to your point.
Very optimistic at this point.
Yes.
Thanks, so much.
Yeah.
Thank you.
There are no further questions registered at the moment, so I'd like to pass the call back to Palmer CEO for closing remarks.
Thank you Balan.
Once again, thank everybody for joining the call today and conclude my remarks by reiterating how proud I am of our quarterly results and more importantly, our teammates who made it happen.
Constantly reminded each and every day of the importance of discipline and the ability to stay focused on our core fundamentals, which we have done.
We certainly have the skills, we have the markets and talent to execute on our strategies.
Very committed to top of class results and I just want to thank you all again for your interest in aerospace.
Have a great day.
Thank you. This concludes today's conference call you may now disconnect your lines.
Uh huh.
Yes.
Yes.
Okay.
Sure.
Yeah.
Yeah.
Yeah.
Okay.