PNFP - Ameris Bancorp Delivering On Self-Improvement

2023-03-06 16:24:00 ET

Summary

• Ameris came up short on the topline in the fourth quarter, as a more fixed-rate loan book compared to many peers caps the near-term benefit of higher rates.
• Management has meaningfully diversified the loan book while also significantly upgrading the deposit base; modest asset sensitivity should be a positive from here, and I expect better-than-average deposit costs.
• Long-term core earnings growth around 6% can support a fair value around $50, while shorter-term multiples-based approaches support a $54 fair value.

I'm fond of revisiting old ideas to check in on the story and see whether various investment drivers and share price performance have followed my expectations. In the case of Georgia's Ameris Bancorp ( ABCB ), many years ago I saw opportunities for significant improvement but didn't really like the valuation relative to the execution/operational risk. Since then, the shares are up a bit but have underperformed regional bank peers and in-market comparables like Pinnacle Financial ( PNFP ) and Synovus ( SNV ).

Even so, I'm more interested in the shares now than I was before. I like how the company has built up its C&I lending operations, though there's still more work to be done, and improved its deposit base. Ameris competes in some hotly contested Southeast markets, and regulators seem bound and determined to make M&A more difficult, but I do think there is double-digit appreciation potential here now.

Mixed Trends To Close The Year

While there are definite positives to the Ameris story, there are also some challenges, and I believe those challenges contributed to a less impressive fourth quarter relative to expectations. In particular, mortgage banking remains quite weak, while the structure of the company's loan book has held back some of the bank's leverage to higher rates.

Revenue rose about 9% year over year and declined about 3% quarter over quarter, missing expectations by about 4% (or a little more than $0.10/share). Net interest income rose 34% yoy and 5% qoq on a fully-taxed basis, which was actually a little soft compared to many comparable banks for the quarter (where growth was in the high single-digits or low double-digits). Earning assets grew 4% qoq, which was quite strong, but net interest margin improvement was more modest at 6bp qoq to 4.03%.

Adjusted non-interest income fell 43% yoy and 29% qoq, and the bank continues to suffer from weak conditions in the mortgage banking business (down 43% qoq as reported). With high rates hammering the residential market, activity has dropped off sharply, and a business that once generated around 15% of the bank's revenue generated about 8% in the fourth quarter.

Adjusted operating expense rose slightly (less than 1%) from the prior year and fell about 3% sequentially. Even with better-than-expected operating efficiency, pre-provision profits rose 19% yoy but fell about 2% sequentially, which again was quite weak in a quarter where many banks managed high-teens or better sequential growth. I will note, though, that at 2.25% of average assets, Ameris is still pretty profitable at the pre-provision income line.

By my math, it looks like Ameris missed expectations by about $0.07/share at the pre-provision line, with provisioning and taxes driving most of the downside from there.

A More Diverse Loan Book, With Improving Rate Leverage And A Good Core Funding Position

There has been good and bad news with Ameris' lending efforts since my last update. On the positive side, the bank has been active in diversifying its lending activities, with C&I growing from less than 10% of lending to about a quarter of the business. I like the move into equipment finance, though premium finance is a little more debatable - I've seen many banks generate good returns in this business line, but it's not self-funding and the relationships tend to be very transactional.

I also like the bank's growing exposure to multifamily lending. Multifamily is now about 4% of the total book and within the construction loan portfolio, about 40% of that is in multifamily. Given the housing and housing affordability situation in the U.S., and the population growth in Ameris' footprint, I think multifamily is a good place to be for many years to come.

One of the challenges that Ameris has faced is relatively modest leverage to this rate cycle on the earning asset side. Thus far, the cumulative loan beta is less than 20%, as the bank has a significant book of fixed-rate loans. This will adjust higher with time, yields on new production were almost 8% in the core banking operations this quarter, and the bank remains modestly asset-sensitive (giving it leverage to future rate hikes), but that does explain why the bank's net interest income growth has been weaker than some comparable banks with more variable-rate lending exposure.

The deposit side of the balance sheet has definitely improved over the years, and I like the leverage that Ameris offers by harnessing lower-cost, stickier rural deposits for lending into attractive urban markets like Atlanta and Jacksonville. Non-interest-bearing deposits declined only 5% this quarter, better than average, and are still over 40% of deposits. What's more, the cumulative deposit beta of 16.5% is below the average of its peers (in the neighborhood of 23%), and I like Ameris' chances for maintaining a below-average deposit beta and deposit costs through this cycle.

The Outlook

I like the lending franchises Ameris is building in areas like premium finance, small-ticket equipment financing, and multifamily lending. I also like the opportunity to leverage low-cost funding into higher-yielding commercial loans. I do have some concerns about competition, though, as seemingly every bank is trying to win a piece of the loan markets in Atlanta and northern Florida. A good core deposit franchise is most definitely an asset for Ameris, but I do still see competition for loans as a key risk.

I'm expecting around 6% long-term core earnings growth from Ameris, though I do think near-term growth could be somewhat lackluster relative to many peer banks given that slower build of higher-rate loans. While the operating leverage here is pretty good, I would still like to see more improvement in margins, as a relatively modest return on equity and return on tangible common equity does constrain my valuation a bit to around $50.

On multiples-based approaches, Ameris does offer some upside. The mid-teens return on tangible common equity I expect over the next two years supports a 1.8x multiple on tangible book (or around $54/share), while I'm comfortable with a 10.5x multiple on my '23 EPS estimate (10.5x $5.12 equals a fair value of $54).

The Bottom Line

I do think that Ameris offers double-digit appreciation potential from here, with fair value in the low-to-mid-$50s. The worst I can say about that, beyond the risk of competition in its core markets, is that so many banks now offer similar return potential. I don't dislike Ameris, but I'm more interested in names like Pinnacle and Synouvs at this point, even though I do think the upside merits a positive stance here.

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