Ameris Bancorp Q3 FY2024 Earnings Call

Good day, and welcome to the Ameris Bancorp Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

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'll 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 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, and good morning, everyone. I want to thank you all for taking the time to join our call today. I'm very pleased with the top-of-class third quarter financial performance we reported yesterday as well as our outstanding year-to-date metrics. As the fundamentals remained strong in the quarter, Ameris continues to be a peer leader in most key metrics. As you can see, we remain focused on growing tangible book value per share, as evidenced by our 19% annualized growth rate for the quarter. Over the last five years, our tangible book value has increased by a notable 85%. Our profitability remains strong with an above PPNR ROA right at 2%, adjusted ROA of $1.43, and return on tangible common equity of 15% in the quarter. Capital continues to grow with our TCE ratio now in the double-digits at a healthy 10.2%. Common equity Tier 1 is also strong at over 12%. These strong capital levels give us a lot of optionality as we look forward to explore additional growth opportunities within our attractive Southeastern footprint, as well as increased capital returns. We improved our CRE concentration to capital ratio down to 270%, which is a nice move down from our 295% peak a couple of years ago. Our allowance for credit losses was stable in the quarter, representing a healthy 160 coverage ratio. Our third quarter margin of 3.51% remained well above peer levels this quarter with our net interest income continuing to increase. This strong margin has benefited from our granular core deposit base and our DDA composition, which we were able to keep above 30% in the quarter, another top-of-class level. We have a proven culture of expense control, and we're able to reduce our efficiency ratio to 54% from 55% last quarter. Also during the quarter, we executed our second MSR sale of the year, this time selling most of our Ginnie Mae MSRs. This sale resulted in a pre-tax gain of over $5 million and helped to reduce our Ginnie Mae non-performing loans, which fell over 90% in the quarter. Finally, our earning asset base is diversified among both geographies and product types, and our average earning assets grew 7.6% annualized in the third quarter. Our Southeast footprint is strong, which should allow us to enjoy continued growth when appropriate, as well as positive operating leverage. These highlights, along with our focus and discipline, are really what drives our optimism for the remainder of this year and into 2025. I also wanted to mention that several pockets of our franchise were impacted by the two recent Southeastern storms, Helene and Milton, and I'm very proud of how our team responded before, during, and after the storm, taking care of our franchise and our customers. Fortunately, for us, most of our locations did not experience significant damage, and we're back open in short order. In addition, I was pleased that the Ameris Foundation was able to commit funds to the American Red Cross to support recovery efforts in our impacted markets. Overall, I'm very proud of our team and the third quarter performance, which remains industry-leading and above peer levels. The future is bright here at Ameris, and we appreciate the continued support of our customers, teammates, and shareholders. I'll stop there and now turn over to Nicole to discuss our financial results in more detail.

Great. Thank you, Palmer. For the third quarter, we're reporting net income of $99.2 million or $1.44 per diluted share. As Palmer mentioned, we recorded a $5.2 million gain on the sale of the second portion of our MSR portfolio in the quarter, and we also reported about $150,000 of hurricane-related expenses. Excluding these items, our adjusted net income was $95.2 million or $1.38 per diluted share. Two signs of our strong core performance this quarter are our adjusted return on assets, which improved to 1.43%, and our adjusted return on tangible common equity that improved to 15%. We remain focused on growing shareholder value, and we added $1.72 per share to tangible book value this quarter. That's an annualized growth rate of about 19.1%, to end the quarter with tangible book of $37.51 per share. We didn't repurchase any stock this quarter, but the Board did renew our buyback plan for another $100 million through October of 2025. Our interest income for the quarter increased $7.8 million over last quarter, while our interest expense only increased 5.7%, allowing an increase in net interest income of about $2.1 million. However, as I mentioned last quarter, we had about $2.3 million of non-recurring bond interest income in the second quarter. So considering that known anomaly, our core net interest income actually grew about $4.4 million for the quarter, or 8% growth linked quarter-over-quarter. We continue to maintain a strong margin at 3.51%. Remember, last quarter, we had that 4 basis points of one-time margin expansion from the bond portfolio that I just mentioned that we did not expect to reoccur this quarter. So we really only had 3 basis points of margin compression, which was right in line with our guidance on margin kind of bouncing up or down around a few basis points each quarter, but maintaining right around 3.50%. The 3 basis points of core margin compression was related to our funding mix this quarter and it was only slightly impacted by our asset sensitivity. During the quarter, we reported a $6.1 million provision for credit losses, maintaining our coverage ratio at 1.60% of loans and improving to 336% of portfolio NPLs. While I'm on credit, let me mention that with the sale of our Ginnie Mae servicing assets, our total non-performing assets as a percentage of total assets improved from 74 basis points down to just 44 basis points, and our charge-offs improved again this quarter to just 15 basis points, compared to 18 basis points last quarter. Adjusted non-interest income decreased about $6.7 million this quarter, mostly in the mortgage division due to the decrease in production and a reduced gain on sale margin of 2.17%, which was down from 2.45% last quarter. We continue to focus on efficiency, and our adjusted efficiency ratio improved down to 54.25% in the third quarter. Total adjusted non-interest expense decreased $4.6 million in the quarter, mostly in the mortgage division related to the variable compensation from the decreased production. On the balance sheet side, we ended the quarter with total assets of $26.4 billion, compared with $25.2 billion at the end of the year. Total earning assets ended at $24.3 billion, and our average earning assets increased 7.6% annualized from the second quarter to the third quarter. Loans both held for sale and portfolio loans were fairly flat quarter-over-quarter. However, the average balance of portfolio loans during the quarter increased $203 million from last quarter. Much of the increase in two key balances were from the summer seasonality in our warehouse lines, and those fluctuate day-by-day. So they happened to end the quarter down about $85 million. But total loan production in the quarter was $509 million, the highest we've seen in the past four quarters. Many of these loans will fund in future quarters and are at a blended rate of a little over 9%, which will be accretive over our current loan yields of about 6%. For the year-to-date period, portfolio loans have increased $695.7 million or 4.6% annualized, and deposits have increased $1.17 billion or 7.6% annualized. This success has improved our loan-to-deposit ratio and our non-interest-bearing deposits still represent a healthy 30% of total deposits, and our brokered CDs represent only 7% of total deposits. We continue to anticipate 2024 loan and deposit growth in the mid-single-digits and expect that deposit growth will continue to be the governor on loan growth. And with that, I'll wrap it up and turn the call back over to Danielle for any questions from the group.

Thank you. We'll now begin the question-and-answer session. The first question comes from Will Jones from KBW. Please go ahead.

Nicole, I wanted to start on the margin. I know we talked last quarter a little bit about how if you guys continue to see good growth, that maybe you’re willing to give a little bit on NIM percentage as long as the trade-off was still the NII dollars grow. We kind of saw that come through a little bit this quarter. Just curious if you still carry that same kind of mindset as we roll through the balance of the year and into early 2025, or if there's a point where you feel like you may need to get a little bit more defensive on the margin?

No, I think that's a great point. And no, our guidance there really hasn't changed. I mean, we feel like we have a strong healthy margin even at 3.51% is above peer and a healthy margin. And we're very, very proud of our deposit base, and we will protect that deposit base, and then we will also look to continue to grow that. And when we think about margin expansion, we're still right at just slightly asset sensitive or about as neutral as we can be. So any margin expansion that we see coming in is going to come from growth in earning assets. So we continue to look for that growth in NII and focus on that, which again, we had, like you mentioned, about 8% linked quarter growth in NII this quarter, which was strong. So even though we had a little bit of margin compression, we still continue to see that NII growth, and that continues to be our focus.

Yes, okay. That's helpful. And just while we're on the margin, could you just remind us all where you guys stand with the index or higher beta deposits, and then just maybe an early read on how you feel like deposit betas could trend as we start the seasonal cycle?

Yes. So we have very few, less than 2% that are indexed deposits. However, we have a large portion that behave like indexed deposits. So the approach that we've taken is that those higher beta deposits on the way up or the higher beta deposits on the way down. We were very aggressive with reducing deposits the day after the Fed moved. Our operations team did a great job implementing all of those changes. And we really so far, knock on wood, have not seen any pressure. I think the big outlier could be if we start seeing competitors not move, and what we've seen so far is that our competitors have moved as well. So we don't have a lot of market disruption from anybody not being able to move, and so we don't have any reason to believe that we wouldn't be able to continue that with Fed cuts to continue to have a strong beta on the downside.

Yes. Okay. Very helpful. Thanks for that. And then, Palmer, maybe just one for you. I know we have similarly the capital conversation most every quarter, and I certainly can appreciate you guys' very thoughtful and prudent approach to just preserving capital. But at the same time, this is really a pretty powerful earnings environment for Ameris. You guys are accruing capital at a nice clip nearly every quarter. Is there a point in time where you think more opportunistically about deploying some of your excess capital?

Absolutely. I don't think that time is now, though. I think, to your point on being prudent and disciplined, we remain in that camp for now. I think until we get a little more clarity, post-election, see how things shake out. But it's a good problem to have, right? So we're very pleased with where the capital levels are. It gives us, once again, a lot of that optionality I talked about earlier. So for now, we're kind of in a capital building mode, and then we'll see what kind of clarity we have after the first year. But the nice thing is we are in a position to capitalize on that through several different fronts if we choose to do so.

Certainly a nice position for you guys. Well, thanks for the questions.

You bet.

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

Thanks. Good morning. I had a question on the reserve as it pertains to. Do you grow into the reserve from here? Or would the reserves still kind of grow with loan growth and then obviously, quarter-to-quarter may vary on charge-offs and criticized trends?

Chris, that's a good question. This is Doug. Yes. The reserve is going to be model-driven. We're happy with the 1.60%. We think that bodes well for us into the future. And we would just let the models manage it from there on out along with our indices that we have that influence our model.

And anything new on the C&I side in terms of trends on losses into next year, would any of that differ from what we've seen recently?

Our C&I book is very diversified, not only in loan product but also geography as well. So if you take $5 billion roughly in C&I, you've got equipment finance, premium finance, mortgage warehouse, and life insurance. We've got, and then you strip those out and then you get down to core C&I. To answer your question, we've got about $1 billion of core C&I, and we don't see much stress if any at all in that portfolio, maybe about 10 basis points or 11 basis points of charge-offs for the year.

Sounds good, Doug. Thank you for that. And Nicole, just a quick data question as it pertains to loan betas. How would those be similar on the way down in the rate easing cycle as we saw the last two years?

Yes. We don't have any reason to think that our loan betas are going to be different. And again, our mix there is about 60:40 fixed variable. But we have a lot of, or some fixed-rate loans that behave like variable-rate. So we end up really kind of being more of a 50:50 split. When you think about behavior, it's going to be more 50:50 split.

Got it. Great. Thank you all for taking us our questions this morning.

Thank you, Chris.

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

Hey, good morning, everyone. Nicole, I wanted to follow up.

Good morning.

Good morning, Palmer. To follow up on the NIM discussion, could you clarify if the near-term guidance for the NIM remains in the 3.50% range? How should we view the next couple of quarters, especially with some additional cuts expected?

Yes. Overall, our guidance remains consistent, indicating that we might fluctuate by a few basis points each quarter, but will generally stay around 3.50%. We might occasionally dip to 3.48% or rise to 3.53%, but the aim is to maintain that 3.50% level. This guidance is based on our asset sensitivity being very close to neutral, less than 1%. For every 25 basis points shift, we expect about 1 basis point change in margin according to our model. Additionally, any further growth will contribute positively to our margin. Our margin outlook is influenced by this understanding, despite still having some repricing sensitivity in our balance sheet.

Perfect. Thanks for the clarification. And then switching gears to loan growth, I appreciate the comments you guys provided. Is the message the same there, too, in terms of diversified mid-single-digits? And maybe just taking that as we look ahead into 2025, balancing some things like the potential for paydowns to pick up. And in the past, you've talked about maybe some gain on sale for Balboa. So just wondering how you're thinking about the volume outlook.

We remain very confident in our guidance. At the beginning of the year, we were aligned with what we projected. It's important to acknowledge that market volatility can result in some quarters performing better than others. As we observed last quarter, we experienced significant growth in warehouse lines, which we anticipated would decline. Therefore, our growth aligns with our guidance, and we feel assured about our projections through the fourth quarter. Looking ahead to 2025, we believe we are well-positioned due to our diversified business lines and the markets we serve. In this quarter, if we exclude the Ginnie Mae sale—which was a positive development for us—it alleviated many of the non-performing assets and warehouse cyclicality issues. Loan growth for the third quarter was approximately 3% annualized, and we expect the fourth quarter to align with our guidance from the year. As we gain more clarity moving into 2025, we are confident in our ability to take advantage of growth opportunities as they arise. We've made significant investments in new hires across commercial and treasury sectors this year, positioning ourselves well with talent in these growth markets to accelerate when the time is right.

I appreciate it, Palmer. Thank you both for taking my questions.

The next question comes from Manuel Navas from D.A. Davidson. Please go ahead.

Hey, on mortgage, in the past, you've had up to about 150 more employees in prior years. Is there any capacity constraint if we do get a 200 basis point decline or another 150 basis point decline in the Fed funds rate? And kind of how are you thinking about mortgage next year initially?

It's like looking through a crystal ball at this moment. We had expected to see more benefits from the decrease in rates previously, but that hasn't translated into much movement in the 10-year bond other than an increase. What I can say is that with our existing infrastructure, particularly in systems and technology, we are well-positioned to take advantage of this situation. I don't see any limitations in response to your query about a potential surge in activity. We have the necessary systems, talent, and importantly, strong relationships to leverage. Our mortgage operation runs very efficiently. Additionally, if there is an increase, we would likely experience a similar boost in our warehouse activity as well. So that continues to provide us with a positive backdrop. However, looking ahead, I would expect any significant changes to happen more likely in the second quarter of next year than in the first quarter, especially considering the current status of long-term bonds. We'll have to wait and see how the election unfolds and what kind of economic clarity we receive moving forward. This scenario could create a substantial incremental boost for us in terms of income when we consider banks and those positive factors.

That makes a lot of sense. I appreciate that. I understand the NIM guide is in the 3.50% range. If we reach the end of rate cuts by the middle of next year, this is hypothetical, and we see a slightly steeper curve, could you discuss what you might expect for your NIM and growth prospects?

Yes. While I typically don't provide guidance for three quarters ahead, if by the middle of next year rates have decreased and the curve has normalized, I believe we will experience two significant benefits. First, a reduction in rates could serve as a strong advantage for our mortgage business, boosting our non-interest income. Second, if we achieve a soft landing and everything works out, any anticipated growth would contribute positively to our margins. Although the model suggests that this is neutral, greater growth will lead to more opportunities for margin expansion. However, at this stage, margin expansion will depend on growth in net interest income and earning assets rather than changes in the current balance sheet.

Okay, that's helpful. I understand some of those points are hypothetical. We've been waiting for a steeper yield curve for a while. Can I switch to discussing near-term deposit growth? What are the main drivers that benefited this quarter, comparing commercial to retail? Additionally, what factors are contributing to maintaining a lead over loan growth right now? Can you elaborate on what's working on the deposit side?

Sure. There are a few key points to consider. We are a relationship bank and have concentrated on that approach for a substantial period. A couple of years ago, when deposits were abundant, we began to strategize on how to grow our deposits. We transitioned our employees and former loan officers into bankers, shifting our mindset. As a result, we’ve experienced consistent organic deposit growth each quarter, driven by our core and organic strategies focused on building relationships. Our account numbers continue to increase, which is evident in our investor presentations, thanks to new relationships and customers. While I can't reveal all our strategies, we have some successful methods for gathering deposits. Additionally, we experience cyclicality at the year's end, as we service several large public entities, resulting in a surge of deposits. Each year, our balance sheet shows an increase of $500 million to $600 million from public funds and agricultural money. If we adjust our figures from December to September, we see substantial core deposit growth for the year, stemming from our core banking strategies.

And the other thing that's encouraging for us is the growth in relationship units that Nicole was talking about, and that's coming in two fronts. One, when you look at the retail side of the company, they're doing an excellent job of opening up new accounts and granted those are smaller balances, but with those balances and those relationships come fee income and other opportunities. So we've seen a lot of growth for the retail sector. And then on top of that, the investments we've made in treasury over the last two or three years have really started to pay off too. So we're very encouraged by what we're seeing and the trends we're seeing on the deposit front, and that does remain a big governor for us in terms of our loan growth too, as you well know.

That's great color. I appreciate it. I'll step back into the queue.

The next question comes from David Feaster from Raymond James. Please go ahead.

I wanted to follow up on the deposit side. You mentioned being quite aggressive in lowering deposit rates, and that competition is also contributing to this reduction. I'm curious about how your clients have responded so far. How do you identify the pressure points where clients might accept a lower rate without leaving? Additionally, what blended rate are you achieving for core deposit growth currently?

Sure. So I'll start with kind of the core deposit growth. So for the month of September, which is a pretty good judge for us, our blended coming on rate of new production was right under 3%. And that was split out. CDs were a little bit high of about 4.25%, between 4.25% and 4.30%. Money markets came in between 3% and 3.25%. Now in savings, obviously, we're pretty low. So that kind of came in at a blended rate, right, between 2.75% and 3%, when you take all deposit growth, including the non-interest-bearing growth. So again, a 3% kind of coming on rate. And I think your other question was how do you know, how do we know the pressure point and how fast and various can be cut? And so I think some of that has to do with communication. I think I've talked about this maybe before on some calls that we have very good communication, and we have weekly pricing meetings. So we can really kind of keep our finger on the pulse of what's going on in the market. And we have conversations there about if we do see any competitors, we can also talk there about pricing exceptions that our leaders are seeing. And so if we've cut a little bit too far, we haven't cut enough, we can get that just through open communication with our market leaders, and that seems to be working very well.

So the biggest thing for us, David, as you know, we are big on the human touch side of things. So when you look at the commercial bank or even the retail side, that's where I think our folks are doing an exceptional job of staying in front of their customers to the point where you always want to have the option to increase that rate and not have them just quietly go away and pull money out. So staying in front of the clients on a regular basis has always been part of our culture and DNA. And I think that relationship; community bank kind of high-touch feel is really what's kept us close. And to Nicole's point, we monitor it to see if we're starting to see any swings from one way or the other. But the real key to it is just staying on top of your customer base, which kudos to the team out there for doing that on a regular basis.

Yes. That's great. And I just want to touch on premium finance for a second. I mean, that's been a pretty nice growth vehicle. Obviously, profitability in that segment has been really solid. It seems a nice operating leverage. I'm just kind of curious, as you scale larger; I'm curious what are you seeing in that vertical and the pipeline there? And just how do you think about premium finance broadly?

Yes. That's probably one of the bright spots when you look at the different verticals that are out there, not just for us, but anybody knows what they're doing in the space. From a credit standpoint, there are no problems in that space. If you do it right, it's more execution risk as you well know. The yields are pretty good on that. I think we can probably do a better job on burning additional deposits, which we're heavily focused on from some of these premium finance clients that we have. So we're heavily focused on that. But that is a line of business that I think when you look at volatility in the markets in terms of different verticals, that one has been pretty stable for us and been a good provider. So we feel very bullish about the opportunity to maintain and grow that particular sector.

Okay. That's helpful. And then just last one for me. I mean, I appreciate all the guidance on the margin. I don't want to beat a dead horse here. But I mean, looking at it, I mean given the commentary that we just talked about on the funding side, and then kind of where you're repricing or you're putting on new loans and new originations, obviously, the floating rate side could be a headwind, but it actually seems like there's some pretty healthy tailwinds on the margin front. I mean, I guess, at what point do you think we could start seeing margin expand? Because just given some of those repricing dynamics, it feels like maybe in the middle of next year, we could actually start seeing margin expand. Is that a fair characterization? Or am I thinking about it wrong?

I hope you're right. The key thing to consider is our current margin position compared to many of our peers, as we are already at a relatively high level. If we can maintain our position and gain additional margin, that would be a bonus. I'm optimistic that a soft landing could present new growth opportunities, which would be beneficial for our company. We're seeing improvements in our loan rates while deposit costs are decreasing. You're correct in your thinking, and I hope things unfold in that manner. We're starting from a strong position, and our goal is to sustain and incrementally increase that strength. If the economic conditions align, we should be able to achieve that.

The next question comes from Brandon King from Truist Securities. Please go ahead.

Nicole, on the margin guide for 3.50%, what deposit beta are you assuming to get to that number?

We are assuming the same deposit betas that we had on the model going up, so about a 55 beta, and we're hoping that we can beat that.

Okay. And initially, there are no lag effects?

That's right.

Okay. Okay. And the mortgage gain on sale margins declined in the quarter, are you expecting that to bounce back up next quarter? Or is it just a good run rate to go off of going forward?

No, I think you'll see that bounce back next quarter. A lot of that, as you know, just has to do with timing. And so we expect that to go back up next quarter.

Okay. So levels near second quarter levels, is that fair to assume?

Yes. We've kind of guided that, that would be between 2.50%, 2.75% on the high end. So we would expect to see it start bouncing back toward that.

Okay. Thank you for that. And then lastly, Palmer, in your remarks, you mentioned TCE is plus 10% now, and you mentioned taking advantage of growth opportunities in the footprint. So is it fair to assume moving into 2025 that you're potentially more open to M&A?

No. I don't think it's fair to assume that. I think what you have to assume is what the market environment looks like when we get to 2025. But what you can assume is that with the optionality we've created, first and foremost, our focus is always going to be organic. But having that excess capital, it does allow us to look at things from an M&A front if the right opportunity came along, but it would have to be something very special for us because we're pretty disciplined in that regard. And we want things that help raise the boat, not weight it down. So that's certainly an option. But our focus remains primarily on organic growth.

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

Great. Thank you very much, and we appreciate your participation in today's call, and we look forward to sharing our results with you next quarter. We remain committed to top-of-class results, and we thank you again for your time and interest in Ameris.

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