Ameris Bancorp Q1 FY2024 Earnings Call

Good day, and welcome to the Ameris Bancorp First Quarter 2024 Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead.

Great. Thank you, Danielle, 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 some opening general 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 would 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 for opening comments.

Thank you, Nicole. Good morning, everyone. We appreciate you taking the time to join our call today. On our last earnings call, I reminded everyone how we spent 2023 strengthening our balance sheet to prepare ourselves for 2024 with a healthy margin, strong capital, and increased reserves. In the first quarter of 2024, results were evidence of those efforts. Excluding the cyclical and special items, we continue to operate at a 2% PPNR ROA. Our discipline in creating diversification in both the loan and deposit franchise, as well as our revenue streams, has us well positioned. We grew deposits this quarter by 5.6% annualized, and over $46 million of that deposit growth was in noninterest-bearing accounts. This supported our loan growth of 6.5% annualized while maintaining the same loan-to-deposit ratio and an above-peer net interest margin of 3.51% for the quarter. Our balance sheet remains strong with a healthy reserve for credit losses. During the first quarter, we recorded a $21 million provision for credit losses, bringing our coverage ratio up to 1.55% of loans and 325% of portfolio NPAs. Once again, this provisioning was growth and model driven and not related to credit deterioration. I'm very pleased with our capital position. We grew tangible book this quarter by over 10.5% annualized to end the quarter at $34.52 per share. Our TCE ratio is well over our stated goal of 9%, now coming in at 9.71%. And when I look out for the remainder of 2024, I remain encouraged as we continue to benefit from several things. First, obviously a solid core deposit base, a healthy margin, a diversified revenue stream, strong capital and liquidity positions, which certainly provides us with a lot of the optionality we keep talking about for economic changes that may occur, a well-capitalized balance sheet with a healthy allowance. And when you add that with a proven culture of expense control and seasoned bankers in top Southeastern markets, that's really what helps drive our optimism. I'm going to stop there now and turn it over to Nicole to discuss our financial results in more detail.

Great. Thank you, Palmer. For the first quarter, we're reporting net income of $74.3 million, or $1.08 per diluted share. On an adjusted basis, we earned $75.6 million, or $1.10 per diluted share when you exclude the FDIC special assessment and the gain on BOLI proceeds. Our adjusted return on assets improved to 1.20% this quarter, and our adjusted return on tangible common equity improved to 12.88%. We continue to build capital and we remain focused on growing shareholder value. We also purchased approximately $2.1 million of common stock during the first quarter, and we have approximately $94.7 million remaining available through the end of October. On the revenue side of things, our interest income for the quarter decreased by $2.8 million over last quarter, almost all from the day count, with February being a short month. In addition, most of the loan growth for the quarter came in March, so we didn't get the full benefit of that growth on the income statement for the quarter. As expected, deposit costs rose this quarter, causing our net interest income to decline by about $4.7 million. But the pace of the deposit cost increases continues to moderate as the cycle matures. Our net interest margin remains strong at 3.51%. We were pleased with just 3 basis points of margin compression this quarter and very excited to still be above a 3.50% margin this late in the cycle. Our yield on earning assets increased by 4 basis points while our total funding cost increased only 9 basis points. Now, I want to remind everyone that we continue to be close to neutral on our asset-liability sensitivity as we've programmatically repositioned our balance sheet over the past two years to be ready for unclear Fed decisions. We're prepared for the next Fed decision, whatever and whenever that is. We've updated the interest rate sensitivity information in our presentation on slide five. Kind of moving on to noninterest income that increased by $9.6 million this quarter, mostly in the mortgage division due to the increase in gain-on-sale margins improving. And then moving into expense, our total adjusted noninterest expense increased by about $6.5 million in the first quarter, most of which was due to the cyclical payroll taxes and 401(k) matching contributions. Our adjusted efficiency ratio was 54.56% this quarter and was elevated because of those cyclical payroll items, but we do anticipate maintaining an efficiency ratio below 55% for the remainder of the year. On the balance sheet side, we ended the quarter with total assets of $25.7 billion, compared to $25.2 billion at the end of the year. Loans increased by about $330 million this quarter, and deposits increased by $289 million. That represents a 6.5% annualized loan growth and a 5.6% annualized deposit growth. We continue to anticipate 2024 loan and deposit growth in the mid-single digits, and we expect that deposit growth will be the governor on loan growth. We remain focused on a successful 2024 due to our well-positioned balance sheet and our strong market. And with that, I'm going to wrap it up and turn the call back over to Danielle for any questions from the group.

We will now begin the question-and-answer session. The first question comes from Casey Whitman of Piper Sandler. Please go ahead.

Hey, good morning.

Good morning.

Good morning, Casey.

So, Nicole, I know you commented just about how you're in a relatively neutral position to rates, but can you walk us through sort of how you're viewing the margin over the next few quarters? And then is it safe to say for Ameris, you sort of reached NII inflection here? We might start to see that grow? Or is it too early for that?

I appreciate the question, and I've been cautious about using terms like inflection and trough. I don't want to oversell, but I would like to highlight some positive points regarding our margins. Firstly, our beta catch-up this quarter was only 4 basis points, compared to 8 basis points last quarter and 14 basis points a year ago, which is a trend we value. Additionally, in terms of deposit mix, we typically experience a lot of cyclicality in public funds during the first quarter, which can create noise in our margins. However, this quarter we did well in maintaining our 31% noninterest-bearing mix. Even with the cyclical outflows, our deposit mix change resulted in only a 1 basis point decline in margin, compared to an 18 basis point decline in the first quarter last year when we usually see that noise. So while I'm cautious, there has been positive movement on the deposit side. Overall, those 4 basis points and the 1 basis point give us a total of 5 negative basis points. We also had 2 positive basis points from asset sensitivity, contributing to a net compression of 3 basis points. The variable in this situation is the deposit costs and how they will evolve moving forward. Nevertheless, we can clearly state that the trend indicates a slowdown in beta, stabilization of the deposit mix, and a marginal asset sensitivity where some loans are repricing.

Okay. Thank you for all that. Just switching gears, any comments you can provide just to the outlook on mortgage feeling like the open pipeline and you had a higher gain-on-sale margins. Just suggest you're set up for a stronger year than last year. So just sort of what are you seeing on the ground there and what is a good expectation for revenue growth this year, even if we don't get cuts?

Yes, Casey. This is Palmer. We are very pleased with the core bank's production this quarter. The addition of mortgage performance has been the icing on the cake. The outlook for mortgage is positive. However, as we observed recently, the shifts in the 10-year rate and the subsequent decrease in volume have impacted us. We’ve had a strong start to the year, with some momentum, but much of it is driven by market conditions. Our business is primarily focused on purchases, which is encouraging. There is still a demand for mortgage products, as people are purchasing homes with the intention to refinance later. This quarter, we've seen significant improvement in gain on sale margins, but it might be too soon to expect that to continue, considering the current cycle. I anticipate we'll remain above the 2% range, possibly between 2% and 2.5%. We are encouraged by our performance, but the volume, especially with the types of loans we handle, is heavily influenced by market rates. Recently, we've experienced another shift in the opposite direction. The pipeline looks strong for the first part of the year, and many are noting reduced seasonality, which may have been influenced by our market focus. Being concentrated in Georgia, Florida, the Carolinas, and the Mid-Atlantic has proven beneficial. Overall, we expect to perform better than many of our peers due to our positioning, but the outlook for rates remains uncertain.

Okay, understood. Thanks for taking the questions and a nice quarter.

Thank you.

Thank you.

The next question comes from Will Jones from KBW. Please go ahead.

Hey, great. Good morning.

Good morning.

Good morning.

Hey, continuing with the mortgage discussion, it was great to see higher revenues, but another significant point is that we didn't see the same increase in expenses as we did with revenues. The cost containment has remained solid. As we look at the seasonal increase in mortgage trends from here, do you think you'll be able to maintain the same level of cost containment on the mortgage side? Also, Nicole, regarding the first quarter, is the expense run rate a good starting point for the rest of the year? We do have some seasonality coming up.

I'll address the mortgage question first. On the mortgage side, they did an excellent job managing expenses, but as production increases, we can expect some growth in expenses related to commissions, incentives, and data processing. They usually maintain an efficiency ratio around 60%, so you should consider that when projecting revenue growth and related expense growth. Additionally, for the run rate from the first quarter, I want to point out that we have about $4 million in cyclical payroll taxes and 401(k) match for the first quarter, which will decrease as the year progresses. There will be a small impact in the second and third quarters, but the $4 million increase will only affect the first quarter. Aside from that, there are no other significant anomalies regarding the run rate in the first quarter.

Great.

And Will, just to add that, you know, one of the things that we have kind of prided ourselves on, and I give full credit to the mortgage operators, is that the capacity that they've created and their ability to leverage up that operation is tremendous relative to a lot of our peers. And a lot of that has to do with technology, and certainly, a lot of that has to do with talent. So, when you think about potential tailwinds for the industry or our ability to absorb additional volume in that area relative to our fixed cost, we're probably in a very good position relative to most others just because we've got that infrastructure in place and we have that talent in place.

Yes, that's great. It’s certainly more desirable to take an offensive approach. I have a quick question regarding credit. The trends appeared generally positive, and we even observed a decline in non-performing assets, although you did increase the office reserve. I understand the office segment is somewhat larger for you, relatively speaking. What were some of the factors that contributed to this reserve build?

Well, I think you'll see if you look at the metrics on office right now, knock on wood, we have zero delinquencies and zero charge-offs, and it's pristine. And so, ours is model driven, as I said in my initial comments. So when we run our models and Moody's model, and we look at the CRE index and office in particular, that's really what's driving that. So, there's no signs at this stage of any credit deterioration.

Okay, that's great. Thank you.

The next question comes from Russell Gunther from Stephens. Please go ahead.

Hey, good morning, guys.

Good morning.

Circling back to the margin discussion you guys mentioned in the deck, could you quantify about $10 billion of loans repricing within the year, either maturities or floating rate? Just kind of focus on the more fixed piece and what the magnitude coming due is and what you'd expect the pickup in yield potential to be.

Sure. When we consider repricing, approximately 36% to 37% of our loans are set to reprice in the next year at around a 7.50% rate. A significant portion of our portfolio includes fixed-rate loans that behave similarly to variable-rate loans. For instance, our premium finance loans have a duration of about 10 months; although they are classified as fixed-rate, they operate like variable-rate loans and have already repriced. As a result, we don’t see an urgent credit issue related to repricing. Additionally, our warehouse lines are fixed-rate yet function like variable-rate loans. Therefore, we actually have a balance of roughly 50% fixed and 50% variable.

Okay, got it. Thanks, Nicole. And then, maybe just moving on to the capital discussion. When you're in a very healthy position, excess capital bought back a little stock this quarter. How are you thinking about deployment priorities? And does a more active stance on the buyback, something you'd consider in '24?

Yes. At this stage of the game, I don't see any change in our approach there. We're very pleased with the capital we've been able to accrete, and we certainly have the buybacks in our quiver in terms of our ability to execute on that. But right now, we're kind of just in a capital preservation mode as we work through this economic cycle.

Okay, great. Thank you, Palmer. And then, last one for me. You guys touched on the reserve a bit, perhaps related to office. Overall, just a really steady build above peer ratio. Where do you expect this to trend going forward? And then separate, just kind of follow-up would be helpful to get charge-off activity within Balboa and whether there's any change in that outlook as a part of '24.

Regarding the reserve, as Palmer mentioned, our approach is model driven, relying on indices relevant to our loan portfolio composition. Currently, we are at 1% to 1.55% based on Moody's forecasting from March. Any future changes to the reserve will be guided by these models. In terms of charge-offs, we recorded 25 basis points for the quarter, which is an improvement compared to the fourth quarter of last year. Charge-offs in equipment finance remain somewhat elevated, but it's important to note that this is a high-yield, higher-risk sector. While we anticipate some charge-offs, we've also taken measures to tighten certain credit standards in that division. However, we recognize the good yields from that loan business.

I was wondering if you have the actual charge-off impacts for the quarter and can remind me of the expected range for lifetime losses within that segment.

If you look over, you know, a 10-year history, the loss rate for equipment finances is probably sub-2, 1.5 in that range. Are you asking about this quarter in terms of a dollar amount or percentage or what was only a…

Yes. I'm just trying to get a sense of the 25-basis point kind of all-in number what Balboa's contribution was for this quarter.

The majority of that, around 90%, was related to equipment finance.

Got it. Okay, great. Thank you all for taking my questions.

The next question comes from Christopher Marinac from Janney Montgomery Scott. Please go ahead.

Thanks. Good morning, Nicole. I wanted to try to connect the dots with the net interest margin possibly bottoming sooner versus later, and then kind of what that means going forward to the PPNR ROA. Could you see that profitability get even stronger as margin possibly gets better?

We've mentioned from the start that if we could finish this cycle with a 3.50% margin, we would consider it a success. Being at 3.51% at this point is fantastic. Even if we experience some short-term declines in the next quarter, we’re looking at staying within the range of 3.48% to 3.52%, which we view as a strong margin that we are pleased with. I'm often cautious when predicting a low point, but we're happy with the 3.50% margin. The pace of our deposit price increases has definitely slowed. We have implemented effective strategies, particularly with our retail and broker CDs maturing early. Also, about 37% of our loan book is set to reprice. We believe we are well positioned. We could see a bit more compression, but it appears to be slowing down.

Great. That's helpful. Thank you for that. And I had a credit question as it relates to SBA. Is there anything that you see down the road on SBA that would be influential for either charge-offs or just credit in general?

Chris, not significantly. The portfolio is experiencing some stress as most people know about small businesses. When the lowest cost of capital is around 10% or 10.5%, it does create pressure on this group of companies. However, we have the guarantee in place and we are recognizing those losses as they happen, and we might see a bit more in the future. Nevertheless, that portion of the portfolio is only about 1%.

We are optimistic about the situation, but I would like to see more activity in that area. As we discussed, the lack of increased volume in recent years, primarily due to the focus on the Paycheck Protection Program, has likely reduced any additional credit risk in our overall portfolio. Although, as Doug mentioned, the risk is minimal overall. There will undoubtedly be some stress, and I believe the SBA may introduce deferment programs similar to those in the mortgage sector to help manage this stress. However, at this moment, we remain confident in our current position.

Great. And then last question just has to do with, Palmer, I guess, the discipline that you've mentioned before about matching new loans and new deposits. Is that still, you know, the game plan going forward?

Absolutely. You just mentioned margin, and one important aspect to consider is the value of acquiring noninterest-bearing deposits. We certainly aim to manage what we currently have, but more significantly, we are focused on building for the future. The growth in our DDA this quarter is a testament to our ongoing efforts that are beginning to show results. Our focus over the past year, which is not a new strategy, has been on treasury management and alignment. One key advantage that banks can have, if they remain disciplined, is to let deposits guide loan growth. We feel we are a strong example of this, and we expect this trend to continue.

Great. Thank you for taking all of our questions this morning.

Okay, thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Palmer Proctor for closing remarks.

Thank you, Danielle. And we appreciate everybody's participation today on the call. And we look forward to sharing our results with you next quarter. Thank you again for your time and your interest in Ameris Bank.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.