Ameris Bancorp (ABCB) Earnings Call Transcript & Summary

Good morning, and welcome to the Ameris Bancorp Third Quarter Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Nicole Stokes, Chief Financial Officer. Ma'am, please go ahead.

Great. Thank you, Jamie, 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 Doug Strange, our Chief Credit Officer. Palmer will begin with 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. 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 statement 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. Good morning, everyone. I appreciate you taking the time to join our third quarter earnings call today. Our focus at Ameris continues to be on building core franchise value through profitable growth strong profitability metrics and disciplined balance sheet management, including our priority of tangible book value growth. And this quarter, again, supported all of these core fundamentals and resulted in a 5-year record high EPS of $1.73 per diluted share. During the quarter, we experienced good organic growth and average earning assets at approximately 5% annualized and deposits at 6% annualized -- and importantly, we were able to drive this growth while protecting our above-average margin of 3.87% in the quarter. All profitability metrics remain strong, including our ROA of over 1.60%, our PPNR ROA of 2.27%and our return on tangible common equity of 15%, even with our strong capital levels. We continue to concentrate on profitable growth and positive operating leverage, which is evident in the improvement in our efficiency ratio hovering around 50% for the year. Our disciplined management of the balance sheet has us well positioned for the future. Our reserve coverage is strong at 1.62% of total loans, which represents 35% of portfolio NPAs. Our capital level with over 13% common equity Tier 1 positions us well for future organic growth in our attractive southeastern markets. We will also consider additional share buybacks and as our Board recently approved another $200 million repurchase authorization. On an annualized basis, reported tangible book value per share grew 5% in the quarter -- excluding the impact of AOCI, tangible book value growth would have been over 14%. Our loan growth production was $2.3 billion in the quarter, which was consistent with last quarter's remaining at a very healthy level. our profitable loan growth was driven by a mix of C&I, residential mortgage and construction and was partially offset by elevated CRE payoffs. On the deposit side, we saw growth in the mid-single-digit range, with our focus being on core deposits and relationship banking. We have a granular deposit base and almost 30% of our funding from noninterest-bearing accounts and almost 48% of our accounts are checking, both noninterest-bearing and now accounts. Credit quality normalized some in the quarter, but remains very favorable compared to peer. CRE and construction concentrations finished the quarter at 250%, and 50% respectively. Overall, I'm very pleased with our financial performance in the third quarter. We're well positioned as we go into 2027 as we continue to focus on organic and profitable growth our attractive southeastern footprint. I'll stop there and turn it over to Nicole to discuss our third quarter financial results.

Great. Thank you, Palmer. In the third quarter, we reported net income of $116.1 million or $1.73 per diluted share. Our return on assets was $1.61. Our PPNR ROA was $2.27, and our return on tangible common equity was 15.01% for the quarter. Our adjusted efficiency ratio improved to 49.15% this quarter from 50.42% last quarter as we saw an increase in revenue and a decrease in expenses. For the year, our adjusted efficiency ratio is 49.84% and I anticipate ending the year around that 50% ratio. Capital levels continue to increase and tangible book value per share grew to 45.65% during the quarter. Our tangible common equity ratio increased to 11.14% and our total risk-based capital was back up to 15%. While we were not active in the buyback this quarter, our Board has recently approved another $200 million share repurchase plan. Net interest income increased $5.2 million this quarter for a total of $257.7 million. We were pleased with our net interest margin of 3.87% just 1 basis point below the 388 we reported last quarter. Our loan yield improvement was offset by the increase in funding costs and our bond portfolio declined slightly as expected as we had a bump in the bond yield last quarter from the inflation bonds. Our asset liability sensitivity is very close to neutral, but we do believe that some margin compression is possible over the next few quarters due to higher deposit costs and competition. We continue to focus on profitable growth, and we expect that our net interest income will continue to grow through that earning asset growth. Adjusted noninterest income decreased approximately $2 million this quarter, mostly from lower mortgage revenue as the production fell mortgage production declined about 13.7%, but our fees only declined about 10.1% this quarter. Again, another testament to our focus on profitable production and profitable growth. Adjusted noninterest expense also decreased this quarter by approximately $2.5 million, driven mostly by lower mortgage-related compensation. Overall, asset quality remains strong with nonperforming assets and net charge-offs at low levels. Annualized net charge-offs improved to 19 basis points this quarter. We continue to anticipate net charge-offs in that 20 to 25 basis point range near term. On the provision, we recorded about $12.6 million of provision in the third quarter, which was a decline of about $4.7 million compared to last quarter and our reserve coverage remains strong at 1.62. Looking at our balance sheet, we ended the quarter with about $28.5 billion of total assets, up slightly from the second quarter. but our average earning assets grew $300.5 million in the quarter or 4.5% annualized. Loans grew $173.1 million or about 3% annualized with our loan pipelines and production remaining at healthy levels. Total deposits grew $319.4 million, partially helped by the beginning of our seasonal inflows of public funds, and our noninterest-bearing mix remained strong at 29.2%. We project loan and deposit growth in the mid-single-digit range near term and expect that longer-term deposit growth will be the governor of loan growth. Overall, it was another outstanding quarter for us. And with that, I'm going to wrap it up and turn it over to the operator for any questions from the group. James, please go ahead.

[Operator Instructions] Our first question today comes from Russell Gunther from Stephens.

I wanted to start off on the loan growth discussion, the call. I appreciate the kind of mid-single-digit near-term outlook. I guess maybe could we start with sort of how you're thinking about the mix of that growth in the fourth quarter, perhaps what the CRE pay down might contribute there? And then just stepping back, bigger picture with the backup in rates and anticipated future hikes. Is there an absolute level of rates where demand destruction occurs and that general target of mid-single-digit growth becomes at risk.

So I would start by saying that the mix of the loan growth, I think, will be very consistent with what you saw this quarter, assuming that loan that the CRE pay off, if they slow a little bit, you could see some growth there as well. When we look at our production, we were really pleased with the production as diversified as it is -- as it was. -- and some of that production will fund in future quarters. So again, looking at CRE, the premium finance, residential. We really have a lot of opportunity for diversification. So I think it will be very consistent with what you saw this quarter. Hopefully, there's -- I always say, I'm a split personality on the CRE payoffs. I certainly like seeing the payoff that shows a healthy market. And again, when the payoffs are coming off 100 basis points less than our production, that's good for the margins. So I like it from that side. But then the other side of me as the CFO, I hate to lose earning assets. So -- but again, if we can refill them at 100 basis points higher, we certainly will take that. So assuming CRE payoff level off, we could see a little bit of growth in CRE next quarter as well, but I think it will be pretty diversified. And then I think your second question was on the loan rates and at what point do we start seeing some pullback. I think for us, we've been so focused on profitable growth and that we've said for many, many quarters now that we don't think we need to get bigger just to get bigger, we need to get bigger to get better. And so we've been focused on that profitable growth, and I think that will continue into next quarter. So those loans, whatever we -- on the loan side, we expect the deposit side to be commensurate. And so we'll continue to focus on that profitable growth and kind of mid-single-digit loan growth going forward.

Got it. Okay. Excellent. Very helpful. And then maybe just switching gears on to the expense side of things. You kind of gave us where you expect the efficiency to shake out for the year. How are you thinking about '27? What's a reasonable kind of growth rate as you guys contemplate continued investments in lending talent and tech?

Yes. I think that right now, consensus has us growing at about 6.8% to 7%. And I think that might be a little bit aggressive, but I think the first quarter is very close. I think where we start getting into maybe consensus being a little bit high is when we kind of look going into the second, third and fourth quarter that right now, I think consensus has expenses going up but they also have mortgage revenue going up. So assuming mortgage revenue, again, kind of take that noise out for a minute and assume just core expenses, I think probably somewhere in the $165 million to $169 million a quarter for the year. And so I think consensus might be a little bit high there as we're getting more into our budget season but I do think that mortgage, of course, could change that. So if something happened in the rate environment and we were surprised, and we saw some room from mortgage to grow, you'd see some expenses grow there. But we're, at this point, anticipating mortgage to be pretty consistent, maybe even down a little bit next year. So those expenses would be affected as well.

Our next question comes from Woody Lay from KBW.

Maybe a follow-up on the profitable growth. And we saw a pretty big move in rates this past quarter. I got the Fed rate hike. Are you all seeing the benefit of that on new loan production? Or is competition impacting some of that benefit?

Woody. Yes, I would tell you, when you look at the growth in our markets, which are very competitive markets, but growth markets, the thing we're focused on, as Nicole touched on was that profitable loan growth. And our growth is really going to be guided by the opportunities in our market and the economic conditions surrounding that. So it will remain measured and disciplined and profitable. But the thing we're focused on too is we've been able to grow mid-single digits, while also protecting the NIM, and that's important to us. We don't feel like we need to chase deals. We are seeing a lot of irrational pricing out there. But we would rather be measured in that approach than be foolish and trying to compete with some of the rates that we're seeing out there. There is a lot of disruption if that is part of your question. And so that does present opportunities. But then how those deals are priced will come down to our disciplines here at the bank, and we're pretty disciplined.

Got it. That's helpful. And then maybe shifting over to deposit costs. And I was just interested if how you all were thinking about deposit betas in an upgrade cycle, especially if we got additional rate hikes? And then kind of where -- if you all had a spot deposit cost at the end of September with the September hike?

We do. So when we look at betas, the rate hike was so late in the quarter that it's -- I hate to even give the betas out because I think a lot of that's going to happen kind of in the first kind of month of the fourth quarter kind of in October is really we're going to see that. So when you look at kind of our prior up-cycle betas and then our down cycle betas, we would expect this cycle to be very similar to the prior cycles. And right now, we're beating that a little bit. But again, I think some of that could come out kind of in the fourth quarter. And then when you look at our spot deposit rates for the end of the quarter, our production for the quarter on new production, so I think there's 2 questions there, production versus spot rates. New production was just slightly higher than the second quarter. But when you look at September production versus June production, they were actually almost exactly the same. And then when you look at spot quarter, I'm sorry, spot deposit costs for the last month just for the month of September, it was about 3 basis points higher than the quarter but our assets were about 5 basis points higher. So there was definitely a positive trend that we liked at the end of the quarter.

That's great to hear. I mean I guess the -- with deposit costs increasing quarter-over-quarter. I'm just curious if the increase is a reflection of the competition driving it up? I mean it feels like the industry might have front ran the hike a little bit -- but it sounds like there will be that catch-up in the fourth quarter as you talked about?

I do. I think you're actually right on both accounts, if that's possible. So I do think that deposit competition. And when we kind of look at our margin, we've got some headwinds and some tailwinds, and it's always that way. From a tailwind perspective, we are slightly asset sensitive. So every 25 basis point hike should be about 1 basis point of margin from a modeling perspective. The steeper curve and Fed increasing helps us with our balance sheet. But then the headwind against that, which is exactly what you said, is that competitive pressure. We feel it definitely on the deposit side. The asset spread and the deposit pricing. So we're watching both of those very, very closely. And then the other piece of that is that deposit mix. If you start -- if we start seeing migration from noninterest-bearing into interest-bearing. So those was -- both of those 2 things would affect the deposit costs. The mix as well as competitive pricing, which is why my margin guidance is down a little bit. I think we're going to bump around a few basis points up and down for a few quarters as all this settles.

But you know, one other point on that, I think it's important to remember from an industry perspective is that we like to talk about all this increasing deposit costs. But what you need to remember is assuming you've got discipline, most people are going to also price up on the loan side to offset a lot of that deposit cost. So I think people are on the assumption that loan rates are going to stay the same and deposit rates are going to go up. Well, that's if you're running that model, it's going to be short-lived. So I would tell you that the way to look at it is, is any increase in deposit costs, hopefully, the majority of that will be passed along in the loan cost too. So there will be a balance there as we go forward as an industry.

Yes. That's really helpful color. Well, that's all for me.

Thanks, Woody. .

Our next question comes from Stephen Scouten from Piper Sandler.

Maybe jump in a little bit on that last comment that you made, the ability to get higher loan rates as rates move higher and deposit costs seem to be going up. What do you feel like is the appetite for your customer base in your markets today, maybe kind of the economic stability and ability to kind of absorb slightly higher rates on the borrowing side?

Yes. I think the -- I think there's a lot of capacity there, not just for our bank but for the industry because when you look at the sponsorship behind a lot of deals today and equity in the deals today, and the cash and a lot of the deals today and debt service coverage, more importantly, under stress scenarios, there's a lot of capacity there, unlike what we've had in prior times, especially during recessionary times. So I think a lot of -- and especially if it's gradual, this 25 basis points and 50 basis points, [ natioratic ], and we jump up 75 basis points to 100 basis points in short order, that does have a shock effect, but in terms of our -- especially our C&I group to be able to absorb that additional rate increase, that capacity is there, the way we underwrite. I think the most important thing is just making sure you're being disciplined, not chasing deals in terms of getting tight on that debt service coverage from the start because if you're already tight from the beginning and then you do have an increase in rates, which we all expect, then that's where things can get a little heated. But right now, based on our book and what we're seeing on the stress scenarios, which Doug and his team run, we've got plenty of capacity there, which is encouraging to see.

Great. That's helpful. And you guys -- maybe if we can talk about the mortgage business a little bit, have always had a really stable, strong mortgage business even in the face of a lot of volatility. Can you talk about maybe how the purchase business, in particular, is trending as of late? And if you expect any material help from if it holds, of course, has moved back down slightly in the 10-year?

Yes. I mean it's all relative right in terms of timing in the mortgage industry, and we are getting ready to move into some seasonally slower quarters in terms of fourth quarter and first quarter. But what we've also done, as you've seen this quarter is you've got to make sure that your -- the expense side is proportion to the revenue decline, and that's what we've done a good job of managing those expenses. I think right now, there's limited inventory. Our purchase mix right now still runs 90-plus percent purchase versus refi. And -- but when you're in transient markets like we are in some of the higher-growth markets, there's still opportunity there. I think a lot of folks, what we're going to find is if there is a pullback in the 10-year that most folks are going to go ahead and take advantage of that because I think people have come to the realization that rates are going to remain relatively or a higher rate environment for an extended period of time. So what we're encouraging borrowers to do is go ahead and make that purchase and allow us to fund that and then we can always refi later. So I think any pullback we see could be very helpful to the volume, which for all of us has moderated considerably, especially as we move into fourth and first quarter.

Yes, that makes sense. And how -- just at a high level, how do you guys think about the efficiency ratio on average for that business? Versus the rest of the bank?

It's running higher now than we would like. Typically, for us, it runs in the 60% range. And then now it's considerably higher than that just given where we are. We have been able to maintain. We had a little improvement in the gain on sale this quarter too. But I think the key to being -- having that efficiency there is making sure that as your revenue declines or expenses are also declining at the same time. And back to my earlier point, that's what's been evident in how we've operated our mortgage company. And we'll continue to. And then on the flip side of that, as you garner some benefit from technology and automating everything you've got in terms of being able to lever up the platform. So we spend equally as much time on trying to figure out how we can build capacity into the platform with what we have as opposed to just WACC in expenses.

Yes. No, that's very helpful. Great. Congrats on a really good quarter.

Thank you.