Ameris Bancorp
NASDAQ:ABCB
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Ameris Bancorp
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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.
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.
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 summarized the value in our company is what creates a positive outlook we have for the future. And 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. And 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. And 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.
And 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.
Of course, we've got a solid granular core deposit base with low levels of uninsured uncollateralized funding. And then more importantly, a prudent culture of expense control, which is evidenced by our 53% efficiency ratio even in the current margin environment. And 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.
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%. And 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, that's 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, that 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 the 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. Kind of the contributing factor to that 16 basis point margin compression or 19 basis points of the negative deposit mix, that's noninterest-bearing transitioning to interest-bearing. We had seven basis points of beta catch-up on the deposit side. And then 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, and that's really explained in three categories. First, we had a decline in our deferred $591 million 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.
And then finally, we had an increase of $3.1 million in fraud, forgery and litigation resolution expenses. We really 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 as expected to $25.8 billion [ph] 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. And our total deposits increased by $545.7 million during the quarter and that's core deposits increasing about $187.9 million and brokered CDs increasing $357.8 million.
So with that, I will wrap it up by reiterating how we remain disciplined and focus on operating performance. We're optimistic about the remainder of '23. I certainly 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 Instructions].
We have our first question from Eric Spector from Raymond James. Your line is now open.
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?
Yes. So you're exactly right. We did see more aggressive movement early on in the quarter because remember, kind of all the silicon and signature and all of that noise that came in, 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 kind of 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 what is -- where does noninterest-bearing stabilize? And we're still 33% of our total deposits. They are noninterest-bearing, which is very robust. And we feel like if we can continue to keep that in that 30% to 33% range, that would be a win.
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? And when 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?
Yes, good question. I think what you'll see is a lot of our growth is reflected in the slide deck came from some of the increased lending we had in our mortgage warehouse, and that reflects more of the seasonality in the business, which we kind of touched on last quarter that the mortgage volume has a tendency to kind of revert back to more historical times where we have more seasonality, second and third quarter are generally very strong for that business.
In the fourth quarter I would expect that to moderate -- so that was really -- if you back that out of our run rate there in terms of production, it puts us right back in that kind of mid-single-digit growth rate, which is where we'll probably end up around the end of the year. So I don't expect to see any increased growth above and beyond that.
And in terms of the yields on the portfolios, yes, I think -- which is similar to what you're probably hearing from a lot of other peer banks, we're getting a lot of their yields on the portfolio across the board, and you name the vertical, and we're all getting better yields and getting better deposits. So I think that discipline is in place and has been but that's certainly a relief to us just given all the deposit pressures that are out in the market.
Got it. Got it. Thanks. And then I guess just going off of funding costs and loan growth obviously, margin is not, it is an output, not 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?
Yes. So we do not have any more rate -- we don't have any rate assumptions built into our guidance. So this is based on flat rates. We have programmatically gotten our balance sheet to be about as close to neutral as what we can get. We are about 1% plus or minus in those of plus or minus 100 fields.
So very, very close to neutral. I would say that the real question of driver of margin is exactly your first question is that noninterest-bearing mix. So for us, about every $100 million that goes from noninterest bearing and you have to assume it goes somewhere. So whether that goes in like a higher rate CD or an FHLB advance or even higher money markets, assuming that it goes into the higher of that -- kind of a higher CD, every $100 million of movement there is about two basis points on the margin.
So I certainly do not think -- I think we're very pleased with the 360 margin that I don't -- I'm not ready to say that we've troughed even though we're very close to neutral, I just think that, that movement from noninterest-bearing to interest-bearing as well as competitor pressure and what some of our competitors are doing can still cause some pressure on the deposit side. So I feel like anything that we're going to get -- that we're going to gain on the loan repricing side, we will probably be giving up on the deposit side. Again, don't think that we've hit the bottom yet, even though the model may show it, I think the practicality of what's going on in the market can cause a little bit more compression over the next few quarters.
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.
Sure. There are definitely some things that are on the move. Where we've seen kind of wage inflation stabilized over the last nine months. What we are anticipating, and it's probably more of a 2024 expense, is some of the benefit side. Just with health care costs, we anticipate some of the benefit costs going up for next year.
We're already in that modeling. And so while we do a really good job of controlling expenses, I do see kind of a -- I think we've guided really no difference than we've guided before, kind of that 3% to 5% increase in expenses next year. And that -- again, we do a good job controlling what we can, but between the increased FDIC insurance costs and then also kind of health insurance and some of those benefit costs. We're still in that kind of 3% to 5%. And again, that excluding kind of the variable cost of mortgage. So if you kind of take out the mortgage and look at everything else, that's where I would guide that 3% to 5% increase in noninterest expense.
Got it. Thank you. Congrats again on a good quarter.
Great, thank you.
We have our next question coming from Brady Gailey from KBW. Your line is now open.
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 like I think fraud was up -- but when you look at the back half of this year, how do you think about expenses? Like could expenses take a step down in dollars in the third quarter relative to 2Q just because 2Q had a couple of one-timers?
Yes. I'm glad that is exactly the messaging -- is that we did have these three one-timers or two. I don't know that the deferred FAS 91 fee. I think that will continue. But as far as the mortgage was variable. So when mortgage production comes back down kind of in the fourth quarter, so I think third quarter would be similar to second quarter and then stepping down in the fourth quarter. And then the fraud, forgery and again the litigation resolution, that would be a nonrecurring or not expected to recur.
Okay. All right. And then I know you guys have guided to an efficiency ratio of 52% to 55%. As the margin has been coming down, like it did in the last three quarters, the efficiency ratio has gone from 50% to 52%, now 54%. Like it feels like just given the revenue headwinds, I mean, for you guys and for the industry. I think it feels like that efficiency ratio could potentially slip above that range in the near-term. Is that -- do you think that's possible? Or is there stuff you can do like cost cutting on the expense side to keep it at 55% or below?
Yes, our target is still that 55%. And while it did creep up a little bit more, and I think even when you go back to last year when we gave the guidance -- started at 52% to 55%, people said that's a really big range. What is the difference there? And we even said that's really where we see our margin. 52% would be depending upon what rates do and really a stronger margin, 55% would be depending on rates and a lower margin.
So our forecast still has us in that 52% to 55%, obviously, closer to the 55%, and when you take out some of these one-offs this quarter, that 53.5% kind of comes down closer to 53%. So we're halfway between the -- we're actually on the lower end of the 52% to 55%. So goal is still to stay under that 55% by the end of the year -- for the remainder of this year.
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 is that for the near-term?
Yes. Our 98% of our provision for this quarter is really model-driven that's coming from the CRE pricing index. We use a one year economic forecast. So 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 kind of by that forecast. This was not qualitative factors that drove this. This was model driven.
We have our next question from Casey Whitman from Piper Sandler. Your line is now open.
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 maybe 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?
I think that we should definitely see NII stabilizing and potentially increasing. But again, so much of that is based on that -- on the deposit side. And I would say 80% of my guidance is unhesitant because of the shift of noninterest-bearing to interest bearing. That's really the wildcard in all this. If we could maintain the mix that we have and grow deposits at that mix, then even margin could not take a dig of a trough. So I think we're on NII as a trough and potential growth. But again, it's really that deposit cost side is where we're more focused. We're seeing the pickup on the asset side as expected. I think what wasn't expected was all of the deposit pressure and the media pressure on the deposit side. And I don't think that's any different than any other -- what you're hearing from your other banks, probably.
But the good news there is to, Casey, what we're seeing, at least in most of our markets, which are heavy growth markets, as you know, is that the rate wars in terms of a lot of the specials that were offered out there, those are all maturing or expiring in terms of the sign-up dates for those for some of the more aggressive banks out there. So that funding pressure, at least in most of our urban markets is subsided. And so with that most people that have moved money have already moved it. So I think that 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.
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?
Yes. I think you all saw, we did have a 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 obviously non-dilutive. So we did have a small buyback. But for us, it's the capital preservation, we're very comfortable where the dividend is. We do have the buybacks in place, that arrows in our quiver, but I don't anticipate any activity there this quarter. So right now, it's more about the capital preservation as we go forward.
Ellie, our operator, are we ready for the next question?
Your next question comes from Brandon King with Truist Securities. Your line is open.
So I wanted to get more insight into your funding strategy going forward. What is kind of 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 -- more of those core deposits?
The goal and the intent is absolutely to grow core deposits. And you've talked about kind of the mortgage warehouse lines, and how those grew and about 40% of our loan growth was that to kind of think about that being funded by some of the broker, but really, the core we've said that, within our company that 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. Having said that we're still only at about 8% brokers. So there's room if we needed it from a liquidity standpoint, but the intent is to grow core deposits.
Got you. So I'm just assuming mortgage warehouse is stronger again in the third quarter, we could see an uptick in brokerage, right?
We would look at brokered or FHLB. And then remember, 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. So that would kind of 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.
Okay. And could you also remind us for the municipal money, what sort of rates that come on the balance sheet?
Yes. We typically is 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. But those were kind of our spot cost at quarter end. So assuming that those stay fairly level with no change in Fed rates. We would expect those municipals to maybe a little bit less because they are collateralized.
Okay. And I'm assuming those will help maybe potentially pay down some broker deposits, what is kind of the duration of the local deposits? And what are you expecting to mature later this year?
Yes. We have those structures. So they're very structured, and we have a certain amount maturing every month so that as we're able to grow core deposits, we can pay those off. But we haven't structured it's not very -- it's not like one big lumpy broker. We haven't staggered, from now to the end of the year to be able to do our ratio kind of in that 11% is where we're targeting.
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 kind of what were the potential unique factors regarding that situation compared to the rest of your office portfolio?
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. So it really has been something we've dealt with for a while. The original loan amount was in excess or right around the $10 million mark. So it's a smaller property relative to maybe what you have in mind, but it was an acquired loan. When we get down to the final foreclosure on it, we updated our appraisal as an empty building is sort of a conservative approach on that, even though there is a tenant in there. And at the time that we did that and moved it finally into OREO, we took that write down on it. But it is something that's been, I guess the difference maker there is that the collection efforts on that started really over a year ago. So it's not really indicative of kind of where our office is overall.
Okay. That's very helpful. That's all I had. Thanks for taking my questions.
Thank you, Brandon.
Your next question comes from Russell Gunther with Stephens. Your line is open.
Hey, good morning guys. Just a quick follow-up on the loan growth discussion. I think you mentioned sort of a mid-single-digit core target for the back half of the year. Just any color you could share in terms of what's going to drive that from a mix perspective?
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. But it will be pretty even across the board. We're still seeing and still have good opportunities in C&I and some owner-occupied CRE and then obviously, mortgage and some of the equipment finance. So I think it's -- 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.
Okay. Great. Thanks Palmer. And then just switching gears, last couple for me from a net charge-off perspective. So just curious on what came out of Balboa with 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, I would be curious as a reminder as to what you think from a kind of lifetime loss perspective is for that portfolio?
Yes. The losses in the Equipment Finance division actually in the second quarter were almost spot on what they were in the first quarter, which was about $9.9 million, so the $2.3 million was extraordinary, as Palmer mentioned earlier, that it really was a group of nonperforming loans that were 100% reserved at the acquisition date, and we went through collection efforts over that -- since that time and decided that, that had kind of run its course and that we decided that those loans -- the remaining balance of those loans we charge those off. So they didn't really impact earnings in that regard. And so the net of that particular extraordinary item would really drive the losses in the second quarter in equipment finance down.
The whole portfolio is somewhat of a barometer of the business cycle. That's a little bit the reason why we've got a little higher amount of charge-off run rate today than we saw last year. But I don't anticipate that it's certainly would grow from this point. I think it's stable to probably trending a little bit lower going forward. So it certainly is well managed. And somewhat anticipated -- well, it was anticipated when we did due diligence back 18 months ago that we would bring on additional losses. I guess the opposite side of that, just to be fair about it, is that the going on rate for new business is a little bit sub-13%. So we do have the offset revenue side, which is what is contributing to keeping us above 2% PPNR. So I need to kind of balance the one against the other.
Understood. And I appreciate the color there. And then just last one as a follow-up. As you think about the bank as a whole, how are you guys thinking about potential net charge-off range for kind of this year and next?
That's a great question. And the pre-pandemic normal, I guess, if you try to pull out a bit of normal for us, pre-pandemic was around 19 basis points for the five years or so that preceded the pandemic. And so I think that 18 to 25 basis points is likely to be kind of the normal for us in a normal business environment. So I think that's sort of what I would look at -- is a normalized rate.
Okay. Great. That's it for me guys. Thanks for taking my question.
Thank you.
Your next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is open.
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 kind of as loan yields reset for the portfolio?
That's a great question. So when we -- I guess there's a couple of different numbers to share with you on that, Chris, we modeled it in the 1.5% range is kind of the five years preceding the acquisition date. Last year, we achieved much less than that. But if you take sort of the 19 months since the acquisition in early December of 2021 and take all of the losses we've had and annualize it back, it's about $180 million.
So when you take it in a longer outlook, I guess, than just the quarter or the month, that kind of thing, then you start seeing more normalized rates. I think that that on a three to five-year sort of average, we're probably going to see that number, that's kind of 1.8% to maybe 2.2% is sort of a fluctuation, but sort of more normalized, especially from what we saw in the first quarter or first half of this year.
And remember, we did have the collateral, the primary losses were coming out of loan secured by trucks, medium-duty trucks. And so we did have a glut of those, which drove down the valuation of that when we took those to sell. So a little bit of strengthening there will impact the losses also. So there are several things. But I think in terms of sort of longer run, you're probably looking at kind of that 1.8% to 2.2%.
Great. That's really helpful. And going back to 2021, this really was a surrogate for not bank securities. So you're still way ahead of that from that deployment of excess cash.
Absolutely.
Absolutely.
My follow-up just has to go back to the deposit base and maybe Nicole, as deposits kind of stabilize in terms of rates over the next few quarters. What should the kind of average relationship be? And is it in that four, five year category on average for all of your customer relationships? Or is it longer in some cases?
It is longer. We actually did an analysis. And interestingly, it's split almost one-third, one-third, one-third, is that one-third are very, very long-time customers. They go back many, many years. And then about one-third is kind of in the last kind of in between like the last five years prior to the pandemic. And then the other one-third is kind of new since the pandemic. It's one-third, one-third, one-third, almost evenly split. So we definitely have some long tenure in our deposit portfolio, which is part of why it's so granular and why our average balance is so small, and we don't have a large, lumpy deposits. I mean we are just very much core funded.
You would have [indiscernible] 50-year-old bank to have some of that. So when you look at our 10-year plus, there's a huge swap of -- that's about one-third of it. And then as Nicole said, then you have your five to 10 is another one-third and then less than that. So it is very granular.
Super. Thank you for that. That's very helpful.
Thank you.
Seeing no further questions, I will now turn the call back over to the presenters.
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 and capital as well as our core profitability and stable credit metrics that's positioned us well for the future. And we've got the skill set. We've got the markets, and we certainly have the talent to execute on our strategies, and we remain committed to top class results. But I want to thank everybody again for your time and your interest at Ameris.
This concludes today's conference call. Thank you for your attendance. You may now disconnect.