Ameris Bancorp (ABCB) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Ameris Bank Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I will now like to turn the conference over to Nicole Stokes. Please go ahead.
Nicole Stokes: Great. Thank you, guys. 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 Web site at amerisbank.com. I'm joined today by Palmer Proctor, our CEO, and Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening general comments and then I'll discuss the details of our financial results before we open it up for Q&A.
Palmer Proctor: Thank you, Nicole, and thank you to everyone who has joining our call today. I'm excited to share with you our second quarter results. In fact, I was actually more impressed with our team's results this quarter, and the record earnings we posted in the first quarter, and here is why. One of the big questions, and a very legitimate question from many of our ABCB stockholders and stakeholders was, "What happens when mortgage revenue normalizes for the bank?" And this quarter shows you exactly what happens when mortgage revenue moderates. This quarter reflects purposeful and deliberate actions that Ameris' teammates have taken to reduce expenses associated with the decline of mortgage revenue. It's also very reflective of the investments we've made in top talent and many of our other core lending areas of the company. And also reflects the meaningful pipeline of relationships we continue to build, which resulted in really strong second quarter results as we are reporting net income of $88 million, or $0.25 per diluted share on an adjusted basis. And this represents 1.63 return on average assets, and a 19.46 return on tangible equity. Our adjusted efficiency ratio actually improved from the first quarter, the 54.62% before in the first quarter to this quarter, at 54.07%. As you may recall, we reversed $28.6 million of provision for loan loss expense last quarter. And this quarter, we had just a minimal provision expense due to the positive loan growth we'll talk about. And speaking of loan growth, it was an incredible quarter that we had. When you look at our annualized net loan growth it was right at 5% for the quarter, net of PPP and our indirect runoff, and we still expect to deliver on mid to upper-single-digit loan growth for the year as we look at our pipelines and the opportunities in all of our growth markets. The area I was most excited about was the $100 million of growth we had in C&I, and you'll be able to see this on our slide deck, on page 16. And Nicole is going to discuss the excess liquidity and the impact to our margin in more details in a few minutes. But I did want to mention the continued deposit growth for this quarter too.
Nicole Stokes: Great. Thank you, Palmer. As you stated, for the second quarter, we're reporting net income of $88.3 million or $1.27 per diluted share. On an adjusted basis, we earned $87.5 million or $1.25 per diluted share. And that's really excluding the small recovery on the servicing asset impairment and a gain on sale of premises this quarter. We're pleased with our operating ratios, our adjusted ROA in the second quarter was 1.63, and for the year it's 1.94. Our adjusted return on tangible common equity was 19.46 for the quarter and 23.41 for the year-to-date. As Palmer mentioned, our tangible book value increased by $1.80 or 4.7% from 25.27% to 26.45% during the quarter, for the year-over-year tangible book value has increased $5.55 or 26.6% from 2019 this time last year. In addition, our tangible common equity ratio increased 21 basis points this quarter to 8.83 from 8.62 at the end of the first quarter, and it's increased 113 basis points over the past year from 7.70 this time last year, the approximate $2.5 billion of excess liquidity on our balance sheet negatively impacted this ratio by 120 basis points. So, excluding net cash from total assets, our TCE ratio would have been approximately 10.03% at quarter end, which is well above our stated target of 9%. So, we continue to be well-capitalized and we feel comfortable with our capital and our dividend level. Talking a little bit on margin, our net interest margin declined 23 basis points from 3.57% to 3.34% during the quarter, our yield on earning assets declined by 27 basis points, while our total funding costs decreased four basis points. We did a description of this on slide eight; you can see the 27 basis point decline was attributable to several unusual factors. We had eight basis points of compression from the $4 million decline in PPP income, we have five basis points from the almost $2 million of $1.7 million of accretion income decline, we had five basis points, kind of a bump last quarter, that was a non-recurring revenue related to the sale of that consumer portfolio with four basis points due to the continued growth and excess liquidity.
Operator: We will now begin the question-and-answer session. The first question comes from Brady Gailey with KBW. Please go ahead.
Brady Gailey: Hey, thanks. Good morning, guys.
Nicole Stokes: Good morning, Brady.
Brady Gailey: So, when I look at what happened on the expense side, basically your ability to reduce expenses to help offset the pressure of down revenue and mostly down mortgage. But that was pretty impressive in the second quarter. I mean should that dynamic continue to play out like it did in 2Q going forward, as mortgage continues to normalize?
Nicole Stokes: So, Brady, I'm going to take that question and split it into two, if that's okay. And talk about the mortgage side and then talk about the banking side, because I think there's two different dynamics there. On the mortgage side, we do anticipate, and again kind of looking at mortgage revenue there's two components. One is driven by gain on sale, and the other component is production. And the gain on sale margin really doesn't affect those variable costs. And we feel like we've absorbed all of that into the second quarter. Then when you turn to the production side, the production side is where the variable costs really are affected. We have about an 80% structure there. So, as production comes down, we expect addition cost-saves on the expense side, that's mostly in salary benefits, basically commissions, incentive, and then also on the IT side, because as production comes down your data processing for account comes down. So, those are the two main categories on that build that kind of 80% decline in expenses as the production revenue comes down. So, I do anticipate on the mortgage side. On the banking side, part of the decrease this quarter had to do with deferred costs because of our very strong production. So, I think some of that could come back. I don't think we'll go back to the 83-85 that we were running. But I think the 76 could easily bump up a little bit as that -- as production -- again, we had very robust. And when you think about third, fourth quarter, because is it - it's not quite as robust production, those deferred fees could impact that. So, I think the 76 could easily go up closer to the 79 to 80. But I don't anticipate it going as high as it was in that 85 range a few quarters ago.
Brady Gailey: Okay. And then when I look at your capital base, I mean, Nicole, you mentioned that adjusted TCE is 10%, that's 100 basis points above your 9% target. And your stock has pulled back a little bit here; it's at 11 times earnings, and 1.7 times tangible, which is pretty attractive, but any thoughts on reengaging in the share buyback?
Palmer Proctor: Yes, Brady, this is Palmer. As you know, we've got the plan out there and authorized. And we've got opportunities to do that. And if we continue to see the pullback that we're seeing now because the stock is at a very attractive price, that's certainly a consideration we'll take into consideration.
Brady Gailey: Okay. And then finally for me, maybe just an update on M&A, we saw SouthState enter your market in a big way, this morning, with the acquisition of Atlantic Capital. Would a target like that possibly have been of interest to you? And then just generally speaking, maybe an update on how you guys are thinking about M&A, Palmer?
Palmer Proctor: Yes, no, I think that's a nice transaction for SouthState. I think it's a good bolt-on for them. I think that it's -- whenever you can garner market share in a market like Atlanta, I think it's a good opportunity. And I think that the opportunity for a lot of folks looking at Atlanta as they realize the opportunity here in terms of the growth prospects. And that's what we'll continue to capitalize on. And when you look at where we stand in the market in terms of market share and in the existing platform we have in place, we'll be able to lever that in a meaningful way. In terms of our outlook, we're pretty consistent in terms of what we're looking for. We've got -- we're very disciplined, and, obviously, very principled in what we want to do. So, we take a lot of the social considerations into account in addition to the pricing. And so, we're going to remain opportunistic, which is where we are. And it's nice to be in a position to be able to think that way. But aside from M&A, as you know, we've got incredible organic growth opportunity, and we'll continue to pursue those either way.
Brady Gailey: Okay, great. Thanks for the color, guys.
Palmer Proctor: You bet.
Nicole Stokes: Thanks, Brady.
Operator: The next question comes from Casey Whitman with Piper Sandler. Please go ahead.
Casey Whitman: Good morning.
Nicole Stokes: Good morning, Casey.
Casey Whitman: Well, Nicole, maybe can you walk us through how you are thinking about your core margin over the back-half of the year, with out PPP and accretion? And obviously how liquidity is going to play into that?
Nicole Stokes: Absolutely. So, I was going to say excluding kind of just assuming flat PPP, flat accretion, and flat liquidity; we're guiding for another quarter of mid single-digit compression, that's a couple basis points on the asset side offset. We do think we have a couple more basis points to squeeze out on the deposit side, mostly in that CD portfolio, so, again, kind of mid single-digit compression for the next quarter until we start to stabilize. Again that -- we have that $2.5 billion of excess liquidity, so as we can start deploying that, every $100 million is about two basis points on our margin. So, as soon as we start deploying that we will definitely see the pickup on the -- and have that added back in. But assuming the liquidity stays flat, accretion and PPP stay flat, we're mid single-digit compression for one more quarter.
Casey Whitman: Okay, makes sense. It's all I had. Nice quarter.
Palmer Proctor: Great, thank you.
Nicole Stokes: Thank you, Casey.
Operator: The next question comes from Jennifer Demba with Truist Securities. Please go ahead. Jennifer, is the line muted, we can't hear you?
Jennifer Demba: Hi. Can you hear me now?
Nicole Stokes: Yes. Good morning, Jennifer.
Jennifer Demba: Hi. How are you? My question is on the mortgage business. Could you just talk about what kind of production trends you think you're going to see over the next couple of quarters, and how much of an issue is the inventory shortage right now?
Palmer Proctor: Yes, I'll take that. I think when you look at our current production, and you saw it this quarter, it's still very meaningful. Obviously, we're impacted by the margin. But in terms of the impact from a supply situation, what we're finding is that while supply is in short order the demand is still there. And typically in this business, you've got a lot of seasonality for the second-half of the year. And I don't think you're going to see that. So, I think what's going to happen is it's actually going to be, when you look at the run rate going forward over the next probably two to four quarters, I think it's going to be actually much more stable than what we have historically seen just because that constant demand for inventory into -- and for absorption, which we normally see a pullback as we get into the later end of the year. So, I'm kind of contrarian in that view, and think that in certain markets, as we all know, there is a very high shortage of supply, but the absorption is there. And so I think it's going to continue to be a steady performer for those that are heavily focused on purchase-type activity, which we are with builder or realtors. So, I think that's going to serve us well. We certainly all saw a little pickup in the refi activity just due to the drop in rates over the last quarter. But going forward, I think it's going to be a much more stable type of environment for mortgage, quite frankly, for those that are heavy purchase-oriented.
Jennifer Demba: Okay. And back on the merger interest topic, Palmer, could you just give us a little more detail on what types of transactions Ameris might be interested in, if they make sense?
Palmer Proctor: Yes, I would say those are the kind of transactions we're looking at, anything that makes sense to us. We're big on culture, as you know, here, so it's got to be a very good cultural fit and alignment there. And it's got to be accretive. We're very disciplined in our pricing; we're not going to do anything that's overly dilutive to this company or to our shareholders. But first and foremost, it's got to be a good cultural fit. And so we will remain, like I said, opportunistic and open to other opportunities that are out there, both bank and non-bank type of transactions.
Jennifer Demba: Okay, thank you.
Palmer Proctor: You bet.
Operator: The next question comes from Brody Preston with Stephens Inc. Please go ahead.
Brody Preston: Hey, good morning, everyone.
Nicole Stokes: Good morning, Brody.
Brody Preston: Hey, Nicole, could you just help me around the core expenses. So, I hear you that you think that you can bump back up to $79 million or $80 million with the production. But just when I look at the year-over-year sort of decline, understanding that 1Q is a seasonally high -- a seasonal high for you guys because of the payroll. But you're down from $83 million year-over-year to $76 million, right. So you've effectively taken out $7 million out of the quarterly run rate on a year-over-year basis. And so, just help me understand how you've -- like what specifically has driven that level of a decline in the core bank expenses over the last year while you've been actively hiring people.
Nicole Stokes: Sure, that's a great question. I appreciate it. And so, this really comes back to what we've been saying for several quarters, is that we feel like we've been ahead of the curve on a few things, we did our branch recommendations. And then closed branches there, we were looking at lease opportunities, as leases were expiring to move out of those and kind of consolidate spaces. And so that's, it's been exactly what we had planned. And then if any, we have been able to do hiring, I'll say that we have certainly used and I know people tend to be saying there's reallocation of resources, but finding ways to pay for things. And so, even though we have had new hires, we've also had some attrition, or some retirements, and maybe we've reallocated those funds to be able to move into some other growth markets and not fill those positions in some of our other markets. And then we've also started using technology to help as well and so when you look at the expense down the line, it's just about every bucket, I mean, you'll see data processing, and telecommunications is about the only one that's been flat there. But some of the expenses that we spent there have been able to help us in some of the other non-interest expenses that are down, occupancy is down as well as salaries and employee benefits. And you're exactly right, we had about $1 million, $2 million payroll tax in the first quarter that we didn't have again and then we also had those deferred costs that could come back up into that salary category.
Palmer Proctor: Brody, this is Palmer, one thing in all companies, obviously, the largest expense item is the teammates and overhead. And I think what I've been very pleased with the Ameris team here is the discipline in terms of accountability and expectations and being realistic about it, obviously, but what you'll find a good example is even in our Commercial Banking Group, year-to-date we've hired 11 new individuals, but net that were we were only up to three FTEs. And I think well that's reflective of is just holding people accountable for their roles and their performance. And if you can do that throughout an entire company, whether it's on operational side, on the production side, what you end up with is a very meaningful group of high performing individuals, and instead of just layering in additional expense to mask a deficiency. And so I think that's one of the things that we've been very consequential about this year and last year, and it's certainly paid dividends for us currently and going forward.
Operator: Brody, do you have any more questions? We can't hear you?
Brody Preston: Yes, sorry about that. So, I guess, on the mortgage side, Nicole, just one last question there. If 80% of the expense there is tied to variable comp, if production were down say 5% again next quarter, that mean expenses in that business line should be down 4%, is that how we should be thinking about that?
Nicole Stokes: Exactly, yes.
Brody Preston: Okay, great. Great, thanks for that. And I guess maybe just on further mortgage banking. Is that tied to total production or is that -- are those expenses tied to sold production?
Nicole Stokes: Total production?
Brody Preston: Okay. All right, great, thanks for that clarification. Let me just switching to core loan yields. I think backing out PPP and sort of calculating your core loan yield right around 4.25% this quarter, which is down about 10 basis points from last quarter. Just given that new production yields continue to head down by five to six bps per quarter, year, should we expect a similar kind of decrease in that core loan yields over the next couple of quarters or I guess when do you sort of expect that to subside?
Nicole Stokes: No, you're exactly right. So with our current come on rate, it is pushing our loan yields down and so we really need about a 50 basis point upswing for that to stabilize. So, if rates stay where they're for a long period, we could continue to see some of that compression. Again we have the deposits side to help some of that for sure. But again, we kind of need a 50 basis point swing to really stop that margin decline and anything above that would start to be accretive.
Brody Preston: Okay, and in the HFS portfolio, is this 2.77 yield is that a good normalized yield to use them. I know it can be pretty variable?
Nicole Stokes: It is pretty variable. I hate to say this, but I don't anticipate it going down, so I think you could probably use that and that would be conservative.
Brody Preston: Okay, and on that HFS portfolio Nicole, the pipeline is being down this quarter and NBA forecasts being what they are, I guess we should expect this HFS portfolio continue to lag down from here. And so would you kind of expect it to get back to that $800 million range by some point next year?
Nicole Stokes: I would say that that, we've kind of guided to $900 million to a $1 billion kind of what we think will be the new norm, still has a $200 million to come down, yes.
Brody Preston: Okay. And then just on the mortgage banking division, again, just could you help me understand some of the variability that you see on a quarter-to-quarter basis and the provision line item there, sort of what drives that, is it related to the average loan that you like are in the HFS portfolio or what are the specific components there that drive that?
Nicole Stokes: Sure, some of that is related to how we allocate the provision and so when we start looking at some internal credit metrics, similar to such as deferrals or delinquencies, and then also just when we look at overall general economic factors, we could have some shifts between buckets. And so you'll see, I think what you're looking at is six, when you again look at last quarter, that $4.5 million, we had a $28 million release for the whole company. So, some of that was allocated to mortgage. And in this quarter, you'll see kind of the banking division got the credit, and then retail mortgage got had the heavy expense, but it all kind of net out. So, some of the modeling economic factors as well as an individual internal credit metrics.
Brody Preston: Okay, and then just on the C&I portfolio, it was nice to see some strength there in the core C&I portfolio I think it was up about 12.5% linked quarter. Could you maybe help me understand is that new kind of commitment, is that increased line utilization, is that some of the folks that you hired over the last year are starting to hit their stride. So let me kind of understand what happened there?
Palmer Proctor: Yes, it's a bit of all of the above, which is exciting to see. And a lot of it already has come out of some of our investments we've made in many of the growth markets, including the Charlotte area, North Florida had a great quarter, as did Atlanta, so it has been very consistent, pipelines remain full and most of this was incremental new business. And the other part of it is in some of it's incremental from new markets, which I like seeing. So the investments we made last year are paying off and we're very excited about the outlook there.
Brody Preston: Okay, great. And then just one last one, if I may, Nicole, do you happen to know what the servicing income was this quarter, I think it was $10.1 million last quarter for the mortgage?
Nicole Stokes: Yes, it was pretty consistent with that.
Brody Preston: Thank you very much.
Palmer Proctor: And you know, that's a good point you bring up there for everybody on listening today, when you look at mortgage and you look at potential volatility and mortgage, one thing is not as volatile in the mortgage is servicing income and we've got a meaningful servicing asset there. I think it's important for people to remember that in terms of, it's certainly helpful for us in terms of our forecasting and budgeting and the income coming from mortgage because it's a nice stabilizer for what can sometimes be a volatile line of business.
Brody Preston: Great, thank you all for taking my questions. I really appreciate it.
Nicole Stokes: Great, thanks Brody.
Operator: The next question comes from Christopher Marinac with Janney Montgomery Scott. Please go ahead.
Christopher Marinac: Thanks, good morning. Palmer and Nicole, you've been able to gain business from other bank mergers for a long, long time. So today's news it locally is not any surprise. I'm just curious kind of what makes customers move or existing customers do more business with Ameris since kind of how that gets applied as that sort of deckchairs gets shuffled once again?
Palmer Proctor: Well, I think is fairly typical of all disruption, some of it is when an account officer leaves their bank and moves to another bank, obviously a lot of people bank with people. But then there's the execution side too, and the commitment to the market. I do think that we've benefited from that because we've got a lot of meaningful presence in a lot of key growth markets. But when you start having changes in reporting lines, you start having changes in credit approvals that can be disruptive to the lenders and it can also be disruptive as an end result to the customer, which is what we're all about. So, I think with all the movement out there in terms of M&A, and furthermore, just changes in reporting line, that's presented a lot of disruption that we've been able to capitalize on, I think, we'll continue to going forward.
Christopher Marinac: Is it fair to say, Palmer, that there's more hires coming just from your core lenders on all sides of the bank?
Palmer Proctor: There are new opportunities, and we've got several folks right now. And I'm excited to say a lot of them are coming from some of our new initiatives and new markets, especially in the Carolinas and in Florida. But that being said, the thing that gives me comfort in terms of our projections for growth, we have all the folks we need to deliver on the forecasts that we've set out for the remainder of this year. So, anything beyond that will be incremental lift for us, which we'll continue to capitalize on as we move forward.
Christopher Marinac: Okay, great. And last question from me is just about how fintech is evolving for you at Ameris? What are the priorities or new initiatives there that we should expect in the next couple of quarters?
Palmer Proctor: Yes, I think for us, we like to stay not on the leading-edge, but on the cutting-edge of that. We're obviously heavily involved in a lot of the fintech initiatives that are out there between Canopy and Fintop, and just staying on the forefront of that, but at the same time, it gives us an opportunity to be exposed to that new technology. We've embraced a lot of it. As we've talked about before, robotics continue to be a major focus for us in some of our higher volume areas like mortgage. And then, we'll continue to roll that out in the areas like Premium Finance. And you go into a lot of efficiencies there. We have an aggressive sales force initiative underway right now, throughout the entire company, we were utilizing in many areas of company. But going forward, we will have an -- we've got an active rollout of sales force over the next two or three quarters. And I think the important thing, there're so many things that you want to do, but you got to prioritize in terms of where you're going to see the largest gain in efficiencies. And so, right now, we see that on the robotics front and on the sales force front. And a lot of that has to do with workflow, not just managing pipelines. And that's where we will continue to make meaningful investments. And then obviously, down the road, as we all talk about is what opportunities we might have in terms of our core processes going forward, and getting into a more open architecture type of environment, which is really exciting to me, and I don't think for the industry, we're quite there yet. We've certainly got some prototypes or experimental activity going on, but until that's a little bit more secure, and we've got the comfort of our regulators and everyone else. I think that's probably a couple years out, but in the meantime, there's a lot of the banks can be doing now, to position themselves to become more efficient. And that's what we ourselves on last year.
Christopher Marinac: Great, and that ties all back to the core expense improvements that Nicole was elaborating on earlier, and there's more there in general.
Palmer Proctor: Absolutely.
Nicole Stokes: Absolutely.
Palmer Proctor: Yes. We've always talked about mortgages and how to scale our business. The question is, do you do you execute on that? And with the robotics that we had in place, that allowed us, quite frankly, to make some expense reductions immediately without creating havoc, or some sort of concern in the back office environment. And so, that's where you start really appreciating the efficiency garner from technology.
Christopher Marinac: Great. Thanks for the background.
Palmer Proctor: Thank you.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Palmer Proctor for any closing remarks.
Palmer Proctor: Thank you very much. And once again, I'd like to thank everyone for listening to our second quarter 2021 earnings result call. We're excited about the momentum as you can tell throughout the entire footprint, and we feel like we're extremely well-positioned for the second-half of 2021 and into the future. And as I've always said before, we're going to continue to deliver on top quartile financial results and remain focused on our discipline growth and our operating efficiencies, and growing our franchise value. But thank you all again for your time and your interest in Ameris Bank.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
