Hello, and welcome to today's Ameris Bancorp 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 retract that question, please press star followed by two. I now have the pleasure of handing over to today's host, Jennifer Demba , Chief Financial Officer. Please go ahead.
Thank you, Bailey. This is actually Nicole Stokes. I think Jennifer Demba is somebody that just joined the Q&A. Thank you, and thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the investor relations section of our website at amerisbank.com. I'm joined today by Palmer Proctor, our CEO, and Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening general comments, and then I will discuss the details of our financial results before we open up for the Q&A. 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. With that, I'll turn it over to Palmer for opening comments.
Thank you, Nicole, and good morning to everyone. I appreciate you all taking the time to join our call today. I was really pleased with the second quarter financial results we reported yesterday. As mentioned in the press release, the success we had this quarter goes back to just purely solid banking fundamentals. 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 these while improving our operating efficiency ratio. It's quite a successful quarter for us. Nicole is going to get into some of the details in a minute, but I'll hit some of the highlights.
For the second quarter, we reported net income of $90.1 million or $1.30 per diluted share and $81.5 million or $1.18 per diluted share on an adjusted basis when you exclude the quarter's MSR recovery. These adjusted results represented a 1.40% return on average assets and a 17.18% return on tangible equity. During the quarter, we grew total interest income to over $200 million, and this is the first time we've done that in history of our company. We were extremely pleased with our positive rebound in the margin this quarter as well. Our net interest margin improved by 31 basis points to 3.66% as we maintain funding cost and continued to grow our non-interest bearing deposits.
On the asset side of the balance sheet, we deployed approximately $1.5 billion of our excess liquidity this quarter by investing approximately $500 million into our bond portfolio and then organically growing loans by $1.4 billion during the quarter. We did record a $15 million provision due to the 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. We continue to anticipate that for 2022, loan growth will be in the upper single digits.
As you all know, growing tangible book value has always been a key focus for Ameris, and this quarter, we successfully increased tangible book value by $1.05 per share or over 15% annualized. Actually, our tangible book value now is higher than where it was when we purchased Balboa Capital just three quarters ago, which is pretty impressive. In terms of operating efficiency, our adjusted efficiency ratio improved to 53.66% this quarter from 56.95% last quarter, and we will continue to look for additional operating efficiencies as we move into the remainder of this year. On the credit side, overall quality remains strong. As previously mentioned, we did record a $15 million provision in the second quarter due to the strong loan growth and updated economic forecast.
Our annualized net charge-off ratio was 4 basis points of total loans compared to 9 basis points last quarter, and our non-performing assets as a percentage of total assets was 56 basis points. We remain really cautiously optimistic as we navigate through the present and future environment, and we're going to continue to responsibly invest in our core business and our teammates. I'm going to stop there now and turn it over to Nicole to discuss the financial results in more detail.
Great. Thank you, Palmer. As you mentioned, for the second quarter, we reported net income of $90.1 million or $1.30 per diluted share. On an adjusted basis, we earned $81.5 million or $1.18 per diluted share when you exclude the servicing asset recovery and the gain on sale of bank premises. Our adjusted return on assets was 1.40%, and our adjusted return on tangible common equity was 17.18%. I was pleased with the increase in tangible book value as we ended the quarter at $27.89 per share, an increase of $1.05 or 15.7% annualized this quarter. As Palmer mentioned, our tangible book value is now back above where it was prior to purchasing Balboa Capital just three quarters ago.
Also this quarter, we had only 16 cents of dilution from the increase in unrealized losses on the bond portfolio, compared to 25 cents of AOCI dilution last quarter. Our tangible common equity ratio increased to 8.58 at the end of the quarter, compared to 8.32 at the end of last quarter. We continue to be well-capitalized, and we feel comfortable with our capital and dividend levels. We have a share repurchase program outstanding until October 31 of this year. During this quarter, we purchased about $5 million, and that leaves about $58 million left on the program. We don't anticipate aggressively purchasing in the next few months. On the revenue side of things, our interest income for the quarter increased $19.2 million over last quarter and $28.8 million from the second quarter of last year.
In comparison, our interest expense only increased $374 thousand this quarter compared to last quarter, and it actually decreased $695 thousand compared to second quarter of last year. This caused our net interest income for the quarter to increase by $18.8 million, which was driven mostly in the core bank segment, offset by about $1.8 million decline in PPP revenue in the SBA division. As Palmer mentioned, we were pleased with our net interest margin as it increased 31 basis points from 3.35% last quarter to 3.66% this quarter. Our yield on earning assets increased by 32 basis points, while our cost of interest-bearing liabilities increased just 1 basis point.
About 26 basis points of the margin improvement was from the deployment of excess liquidity into higher earning assets, and about 5 basis points was improvement in total loan yields, including the held-for-sale loans. Of course, I would be remiss if I didn't mention that we were able to improve our non-interest-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 rate in this rising rate environment forever. On the balance sheet side, assets were relatively flat at $23.7 billion compared to $23.6 billion last quarter. However, the shift in earning assets is what really is important here.
We've deployed about $1.5 billion of excess liquidity into higher earning assets to include about $500 million in the bond portfolio, and we funded the $1.4 billion of organic loan growth. We still have about $1.5 billion of excess liquidity, which can be used for cyclical deposit runoff and also future loan growth. While we were pleased with the significant loan growth this quarter and the underlying credit of those loans, we don't anticipate the same level of loan growth in the third quarter. The details of the second quarter growth have been included on slide 17 to recap the summary that Palmer gave earlier. Total deposits increased by $96.5 million during the quarter, but the real win is the mix within those deposits.
We actually grew non-interest-bearing deposits by $393 million, while our higher cost interest-bearing deposits declined $296 million. That now non-interest-bearing deposits represent 41.98%, so we'll just round that to 42% of our total deposits. We continue to be asset sensitive, with NII increasing about 3.8% in an up 100 environment. We've updated the interest rate sensitivity information to our presentation. You can see that on slide 11. Moving on to non-interest income, that decreased about $3.1 million this quarter. We reported a $10.8 million servicing rights recovery compared to $9.7 million recovery last quarter.
Excluding this MSR activity, total non-interest 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. While non-interest income declined 5.5% this quarter, expenses in the mortgage division were relatively flat because of the commissions and incentives on that portfolio production. Total production in the retail mortgage group was about $1.7 billion this quarter with an average rate of 4.65%, compared to $1.5 billion and 3.66% last quarter. Purchase business has returned closer to historic levels at 84% of total activity and has us really prepared for the continued slowdown in refinance. Retail mortgage originations as a percentage of our pre-provision pre-tax income continued to decline, representing a balanced contribution of about 8.5%.
The average gain on sale declined to 236 this quarter, but we believe it will increase back to a more normal level around that 275 range going forward. I think I may have saved the best for last. Our adjusted efficiency ratio improved to 53.66% this quarter, back under our expected 55% goal. Total non-interest 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 a $1.1 million of planned advertising expenses related to our new marketing campaign in the second quarter.
While we're pleased with our expense reduction efforts and we remain focused on our efficiency ratio, slight increases in non-interest expense could occur in the next few months. We're still anticipating an efficiency ratio in that 52%-55% range. I'll wrap it up by reiterating how we've remained disciplined and focused on operating performance. We're optimistic about the remainder of 2022. I certainly appreciate everyone's time today, and we'll turn the call back over to Bailey for any questions from the group. Bailey?
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 KBW. Please go online. Your line is now open.
Hey, thanks. Good morning, guys.
Good morning.
We've seen a lot of banks similar to you guys decide to, you know, portfolio more of their resi mortgage production, just with the rates a little more attractive now than
Than six months ago. How do you think, I mean, I hear you that loan growth is not gonna repeat itself in the back half of the year, which makes total sense, but how do you think about the magnitude of how much resi loan production you decide to portfolio going forward?
Sure. I'll take that. In the second quarter, we portfolio-ed about $515 million, and that was at a really good rate. It was about a 4.73% rate of what we portfolio-ed, and about half of that was variable, and half of it was fixed as far as ARMs versus fixed rate production. We were, you know, purposeful with how we manage that and how we put that on, and that kind of compares to, you know, a mortgage-backed security bond that's gonna be much less rate. We kind of feel like what we did in the second quarter was kind of a one-time event, and we don't anticipate doing that again.
That's really why we kind of drew out the lines of how we looked at our loan growth this quarter to kind of show what we would consider kind of core loan growth more in that 15% range. We really don't anticipate that again. That was kind of a one-time remix of the portfolio and using some of that excess liquidity.
Okay. All right. That's helpful. When you look at mortgage, you know, if you back out the noise from the MSR mark, mortgage was around $48 million in the second quarter. Any way to add a little color to what the outlook of that may be? I mean, it sounds like, you know, you guys are expecting gain on sale to come back up from the second quarter level but maybe production slows. How do you think about the forecast of mortgage banking fees?
Sure. A lot of that is based, you're exactly right, off of two things. It's based on production and gain on sale. There's two factors there. Just for comparison, in the first quarter there, production was about $1.5 billion, and then in the second quarter, it was $1.7 billion of production. Again, we didn't sell all of that production in the second quarter. And then the gain on sale also declined. Going forward, we still are kind of anticipating kind of that $6-$7 billion of production for the year. Year to date, they're at about $3.3 billion of production, and we kind of see it coming in for the year at that between $6-$7 billion, probably closer to the six.
I can see the third quarter being fairly consistent with second quarter. Maybe the fourth quarter, we kind of get back into that normal cyclicality. Again, we're back up to about an 85% purchase versus refi. The biggest challenge right now is inventory for buyers, and which I know we've talked about that before, but we still continue to see some of that. It has gotten a little bit better. I hope that kind of gave you the guidance that you were looking for.
Yeah, that's helpful. Finally for me, I mean, y'all did a great job in the second quarter of holding deposit costs basically flat. You know, as you said, I know it's not gonna be like that for forever, but just remind us how you're thinking about, you know, what deposit betas could look like for Ameris over the next year or so.
Sure. We have based some kind of on empirical data of what we have done, and I'll tell you that we did raise board rates right at the end of the quarter. Deposit rates in the third quarter will definitely be higher than what they were in the second quarter. We are targeting about a 23% beta, and that's about a 55% in the money market, 20% in now and 10% in savings. That is our target, and we're trying to stay within that, and that's what we have modeled into our ALCO modeling as well.
Yep. 23%, that's total deposit beta or just interest-bearing?
That's total deposit beta. That 42% non-interest-bearing certainly helps bring that average down.
Yeah, totally. Awesome. Thanks so much, guys.
Thank you, Brady Gailey.
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, David.
Good morning, David.
Maybe just following up on the deposit side, just staying there for a second. I mean, the non-interest-bearing deposit growth is really impressive at a quarter where a lot of other folks were seeing some outflows. Could you maybe talk about some of the underlying trends that you're seeing there? Any expectations for flow and how you think your ability to continue to drive core deposit growth to fund your, I mean, your organic growth engine is really strong. How do you think you're able to fund that? Where would you be comfortable with the loan to deposit ratio going?
Well, I'll take part of that and let Nicole finish up. I will tell you, David, the value we've seen in the diversification portfolio and growing, especially the C&I side of it, is really where you're seeing a lot of that non-interest deposit growth. They're good core relationship deposits. I think you're fooling yourself if you don't think there's probably gonna be some runoff as we go forward. I do think it's gonna be more prolonged than people anticipate in terms of retaining some of those deposits in light of the uncertainty out in the market. There will be some folks chasing rate. A lot of these deposits on the non-interest-bearing side, as you know, are operating deposits.
That doesn't mean they can't sweep some over into a money market or savings account, but we feel good about the base. I think liquidity, as we look forward into this, whatever your outlook may be between now and the next couple of years, I think that's the name of the game. We've remained heavily focused, even during the pandemic when, deposits were just flowing in across the industry on focus on the relationship side of that. I think we will continue with the efforts on the C&I side, which will continue to build out that non-interest-bearing piece, and then carefully manage the, interest-bearing side.
Right now, as you see, we had a little pullback on overall deposit, but with the non-interest-bearing growing, we feel good about our position in terms of being able to manage the future growth in that, upper single digits based on what we currently have today.
Anything else you want to add, Nicole?
Sure. I was just gonna give you a little bit of color on the DDA growth and kind of split it between the business and the consumer. It's interesting because there's two different trends there. In the business, when we look at the growth, kind of from what we're looking at is kind of November of 2019, that was after the Fidelity Ameris combination, after the conversion, and kind of a good clean run rate, compared to where we are now. When we see those business DDAs, about a third of it is current customers that have expanded their balances with us, and about two-thirds of the growth is new customers. That kind of gives you a mix of where we're getting that growth.
Obviously, our teammates are doing a fantastic job of relationship banking and continuing to grow those core deposits. Then on the consumer side, it's a little bit more mixed, about 50/50. About 50% of the increase on the consumer side is just expanded relationships with current customers, and about 50% is new relationships coming into the bank, so.
That's great. Thank you. Then maybe just switching back to the loan growth side. Just wanted to get a pulse on the markets. How is demand trending from your perspective? Do you think there was any aspect of a pull forward of demand? Just any commentary on how pipelines are trending, expectations for drivers of growth, and whether higher new loan yields may start slowing originations, as you push higher rates, especially on CRE?
Yeah. I think you have to take it by each vertical. As you saw in mortgage, we were up about $200 million in production this quarter versus last quarter. A lot of that was the pull forward of people trying to lock in before rates started moving too much further up on them. There's clearly some of that going on in the mortgage portfolio. The CRE portfolio, we have certainly benefited from increased rates there. Part of it too is people trying to do refinancing on their existing facilities. The demand is still strong, but what it's allowing banks to do, I think prudently, is be a little more selective in what they're doing and how they're doing it.
I think when we look at the pipeline, in addition to just normal production, there's still a lot of unfunded commitments that are out there as well. That's gonna build incremental volume as we go forward, just finishing up projects that were delayed due to, you know, labor shortages and materials and supplies. I think most banks have a pretty robust pipeline already in place in addition to any new incremental business coming in. I think CRE you can be a little more selective on that and still deliver within the range of what you're trying to target. C&I would tell you most of the companies we're dealing with, and these are smaller middle-market kind of companies, they remain very healthy.
When you look at the balance sheets, they still have a lot of cash they're holding on to. They're not overpurchasing in terms of inventory, but the usage there is still not as much as we'd like to see. It's increasing, but I think that's got some upside as we move forward, depending on the severity of the upcoming recession. Balboa, on the other hand, has done extremely well. They've exceeded our expectations in terms of not only production, but earnings and credit across the board. I think that, and as you know, that's got a very strong yield on it. We anticipate seeing continued opportunities there. SBA, I think as we move, we and the industry moves forward, there's a lot more opportunity that we have there.
We need to do a better job in SBA in terms of generating those loans, and I think you'll see more people portfolioing those loans just because the gain on sale premiums have come down. I think that kind of hits all the different verticals, but happy to answer any further questions.
No, that was helpful. You 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 nonaccruals. It looks like it's mortgage driven. Just curious, any commentary on that, and then broader thoughts on asset quality, whether there's anything you're watching more closely or perhaps avoiding, and then any commentary on the reserve and whether it will be likely troughed here or just thoughts on how you think about that.
Sure. As it pertains specifically to Ameris, yeah, the majority of the uptick you saw on our NPAs was related to some of the government-backed mortgage loans that we have, so we'll have to work those through the system. In terms of incurring any types of losses, I don't see that. This is mainly just working those through the system, as you know. If you back those out, it's more normalized. I do think one of the things in terms of the industry, there's a difference between normalization and then credit deterioration. 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.
If you look at individual credit overall for the industry and the prudency of the underwriting, as we go forward and what we've done in the past, and I say past, for the last, you know, since the last cycle, there's a lot more equity in deals. You know, specifically the other loan that was referenced on our NPA increase, one commercial loan, that for instance is a very nice building in a very good location, and we've got a lot of optionality with that.
Underwriting, debt service coverage, sponsors behind deals, I think that's gonna bode well for the industry as we go forward if we do have any sort of pullback, especially if it pertains to CRE. I feel much better about where we are as a bank and where we are as an industry and being able to mitigate a lot of those situations. Depending on the severity of it, I think that when you look at where we are versus, say, the last cycle, I don't think the losses will be there. That doesn't mean you don't have the headache of working through credits, but that's part, you know, we're in the risk-taking business, so we're gonna have to work through those.
Right now, as far as our outlook and that of many others, we are, you know, obviously looking very closely and are cautiously optimistic but don't see any cracks anywhere right now. I think personally there's gonna be more pressure on the consumers going forward than 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.
Mm-hmm.
Thank you. The next question today comes from the line of Christopher Marinac from Janney Montgomery Scott. Please go ahead. Your line is now open.
Thanks. Good morning. Palmer and Nicole, wanna ask about liquidity and kinda how you think through using liquidity capacity you have going forward. Do you wanna still build it, or will you kinda use some of the dry powder in the next few quarters?
Sure. We have about $1.5 billion of excess liquidity right now. I think we definitely have enough to fund the loan growth for the next couple quarters or at least the next two quarters. We've slowed. We are still purchasing some bonds, but we have slowed that a little bit. Again, we continue to try to grow core deposits for that funding, looking to the future past those couple quarters. We do have, and remember, we typically have in the third, the end of the third quarter, beginning of the fourth quarter, a lot of cyclical deposits that come in with some of our municipalities.
Assuming that comes in like a normal year, we'll build some of that back up by the end of the year. We definitely feel like we have the liquidity, but we don't anticipate as big of a push in the future as what we did this quarter between the mortgages and the portfolios and the loan growth and then the $500 million of the bond portfolio. That's slowing a little bit, but we will continue to deploy it.
Great. On the municipal deposits, does any of that get recast in terms of repriced, and is that at all a high beta issue that you just have to work with?
It's really not. Those are core customers of ours that we bank throughout the year. It's just that they get in a lot of the tax money that comes in kind of in that third, fourth quarter, the end of the third, beginning of the fourth quarter, and then it usually goes back out kind of the end of the first quarter. And that's been in our kinda DNA for a while. No, that really doesn't build in and doesn't affect our data too terribly. That's already built into our analysis.
Okay, great. Thanks for that. Palmer, what is your thought about new hiring trends and what you're seeing, whether it's on the commercial side or in the mortgage business?
I think today, at least for us and for Ameris, we're probably a little more surgical and tactical in terms of what we're looking for in the way of talent. We have got, as you know, a wonderful team already in place in mortgage, but we will look for opportunities and be opportunistic. At the same time, and you saw it this quarter, we're cognizant of the expense side of things too, and if volume's there, great. If it's not, then you need to make adjustments. I think selective hires will probably be in our future. In terms of us hitting our projections and loan growth goals, we've got, as we've said before, the team that we need already in place.
I don't think you're gonna see incremental overhead expense coming online to accommodate the need for the loan growth. We've already got that in place. If anything, we'll probably be, like I said, a little more surgical in our approach going forward.
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. Next question today comes from the line of Jennifer Demba from Truist Securities. Please go ahead.
Thanks. Good morning.
Good morning.
Good morning.
Question, Nicole, you said you thought you'd have some more expense growth over the near term, but keep your efficiency ratio within your target. Can you just talk about what's gonna drive the expense growth over the near term? My second question relates to the net interest margin. Just wondering if you have that for the month of June.
Sure. The first question is on the expense. 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. We anticipate that there could be some increases, like we spent the extra $1 million on advertising last quarter. Some wage inflation, some benefit costs that are going up, things like that. Again, we're trying to manage that still keep our efficiency ratio in that 52%-55%. I just was guiding that to maybe some slight increase, but I don't think it's gonna be anything tremendous by any means.
I think your second question was margin, and then what our June margin. The month of June was very consistent with the quarter margin, maybe a little bit higher than the quarterly average margin because a lot of that really we had the benefit of the third month.
Okay, great. If I could ask one more question. Palmer, can you just talk about what you're hearing from the clients in terms of their overall sentiment right now? It seems like based on results we've seen, it has to continue to be pretty positive. I'm just curious what you're hearing.
Yeah, I would echo that same sentiment and, you know, the calls, I love going out on calls with our team. There's still a lot of, I'd say they're cautiously optimistic, and then there are a lot of people trying to be opportunistic in terms of 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're in a good position. And that gives us comfort as bankers to know that they've got those kind of cash reserves. But in terms of our, kind of our middle market clientele and the loan pipelines themselves, they're very robust and remain robust.
What allows banks to do at this time in this kind of cycle is be a little more selective if they choose to do so, which is what we're doing. The demand is still there at this point. I think, there's obviously a lot of negative sentiment that we all hear and see each and every day on the news and media. Contrary to that, in terms of just operating and our operators, they're still, to your point, very optimistic at this point.
Thanks so much.
Thank you. There are no further questions registered at the moment, so I'd like to pass the call back to Palmer Proctor, CEO, for closing remarks.
Thank you, Bailey. I wanna 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. I'm 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 the talent to execute on our strategies and remain very committed to top of class results. I just wanna thank you all again for your interest in Ameris Bancorp. Have a great day.
Thank you. This concludes today's conference call. You may now disconnect your line.