Earnings Call Transcript - ABCB Q3 2025

Operator, Operator

Good day, and welcome to the Ameris Bancorp Third Quarter Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Nicole Stokes, CFO. Please go ahead.

Nicole Stokes, CFO

Great. Thank you, Valentina, 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 comments, and then I will discuss the results of our financials before we open up for 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. 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 comments.

Palmer Proctor, CEO

Thank you, Nicole, and good morning, everyone. We appreciate you taking the time to join our earnings call today. Third quarter results again beat expectations with above peer performance across the board, including return on assets, PPNR ROA, return on tangible common equity, net interest margin, and efficiency ratio. Two of our top focuses have long been growing our core deposit base and tangible book value per share. I'm proud to see our deposit growth at 5% annualized and tangible book value per share growth at over 15% annualized, both very strong metrics. We remain focused on generating revenue growth and positive operating leverage. This is evidenced by our 18% annualized revenue growth in the quarter. And when coupled with a modest decline in expenses and a slight increase in margin, pushed our efficiency ratio below 50%. Our margin continued to expand during the quarter while we grew loans 4% annualized, which is within our mid-single-digit guidance. Our 3.80% NIM remains above most peer levels, particularly thanks to our strong 30% level of noninterest-bearing deposits. Capital ratios grew again in the quarter, which positions us well for future growth opportunities. Our third quarter earnings and capital generation increased our common equity Tier 1 to 13.2% and TCE to 11.3%. Asset quality remained stable with net charge-offs and NPAs, excluding government-guaranteed mortgages at low levels. We grew tangible book value this quarter by over 15% annualized, almost $43 per share, and we're active in repurchasing stock, buying back $8.5 million. Our CRE and construction concentrations remain low at 261% and 42%, respectively. Our 4% annualized loan growth was driven mostly by a good mix of C&I and CRE. Our loan portfolio production also topped $2 billion in the quarter, the best level we've seen since 2022, and deposits grew at a similar pace of 5% annualized with noninterest-bearing deposits remaining over 30%. Our bankers are well positioned to take advantage of growth opportunities and disruption within our attractive Southeastern markets. Overall, we continue to stay focused on what we can control. When I look out at the end of 2025 and toward 2026, I'm very encouraged as we continue to benefit from a history of notable tangible book value growth as good stewards of shareholder value, a granular deposit base, a robust margin and diversified revenue streams, strong capital and liquidity, a healthy allowance and asset quality, and a proven culture of expense control and positive operating leverage; and a notable scarcity value given our size and scale in the Southeast top markets, which really allows us to take advantage of the banking disruption Southeast continues to experience. So overall, I'm very optimistic and confident about our franchise as we near the end of 2025 and look forward to 2026 and beyond. I'll stop there and turn it over to Nicole now to discuss our financial results in more detail.

Nicole Stokes, CFO

Great. Thank you, Palmer. We reported net income of $106 million or $1.54 per diluted share in the third quarter. As Palmer mentioned, our profitability remained at levels well ahead of the industry with our return on assets at 1.56% and our return on tangible common equity at 14.6%, both very robust levels. This quarter, our PPNR ROA was at 2.35%, which is an improvement from 2.18% last quarter. Our efficiency ratio improved to 49.19% this quarter compared to 51.63% last quarter as we saw a modest decrease in expenses, but a really strong 17.8% annualized revenue growth, which is what fueled that positive operating leverage. Capital levels continue to increase with our tangible book value per share growing to $42.90 a share, which was a strong 15.2% annualized growth or $1.58 per share in the quarter. Our tangible common equity ratio increased to 11.31%. We repurchased about $8.5 million of common stock. That was about 126,000 shares at an average price of $67.36 during the quarter. Our Board recently also approved a new share repurchase plan of $200 million, which is double our last authorization of $100 million. Our strong revenue growth was driven by increases in both net interest income and fee income. Our spread income grew by $6 million in the quarter or 10.5% annualized. That growth came from interest income growth of $7 million, which outpaced our interest expense growth of only $1 million. Our net interest margin continued to expand, up 3 basis points to a strong 3.80%. And remember, that's a core margin as it includes 0 accretion. The NIM expansion this quarter really came from a 2 basis point positive impact on the asset side and a 1 basis point benefit from the funding side. We continue to believe we'll have some slight margin compression over the next few quarters due to the expected pressure on deposit costs as we see loan growth really pick up in 2026. We continue to be fairly neutral on asset sensitivity. Noninterest income increased $7.4 million this quarter, mostly from better equipment finance fees and also a $1.6 million nonrecurring gain on securities. Our mortgage production was approximately $1.1 billion with mortgage gain on sale at 2.20%. Our total noninterest expense decreased about $700,000 in the quarter, mostly driven by lower compensation costs in the lines of business, offset by some increased incentives and benefits in the banking division. And as I previously mentioned, our efficiency ratio was strong at 49.19%. While we did have positive operating leverage this quarter, the expanded net interest margin and noninterest income growth was the real driver of that lower efficiency ratio and not necessarily an expense savings initiative. And I do anticipate the efficiency ratio to return above 50% in the fourth quarter. During the third quarter, our provision for credit losses was $22.6 million, with over half of that provision related to reserves for unfunded commitments, which is a really positive sign for our future loan growth potential. Our reserves remained strong at 1.62%, the same as last quarter. Overall, asset quality trends remain good with nonperforming assets, net charge-offs in both classified and criticized all remaining low for the quarter. Annualized net charge-offs were stable at 14 basis points. Looking at our balance sheet, we ended the quarter with $27.1 billion of total assets compared to $26.7 billion last quarter. Earning assets increased $470 million or 7.6% annualized with the bond portfolio growing $287 million and loans growing $217 million or about 4% annualized, which is in line with our loan growth guidance. Loan growth was mostly from C&I and investor CRE this quarter. Deposits increased $295 million with really strong growth in our core bank of $355 million, a small increase in broker deposits of $67 million, and those were offset by a continued seasonal decline in those cyclical municipal deposits of $127 million. We were able to maintain our noninterest-bearing deposits at over 30%, finishing the quarter at 30.4%, and our brokered CDs represent only 5% of total deposits. We continue to anticipate loan and deposit growth going forward in the mid-single-digit range and expect that longer-term deposit growth will be the governor of our loan growth. So with that, I'll wrap it up and turn the call back over to our operator for any questions from the group.

Operator, Operator

The first question comes from David Feaster with Raymond James.

David Feaster, Analyst

I wanted to start maybe on the loan side. It sounds like production remains pretty strong. We saw unfunded commitments increase. I'm curious, maybe first, just touching on demand. How is demand in the pipeline trending as we look forward? I know you reiterated the mid-single-digit guidance, but just kind of curious about the pipeline and the complexion of that? And then just how payoffs and paydowns are trending and how that's impacting growth near term?

Palmer Proctor, CEO

Yes. I think one of the things that drives our optimism for the fourth quarter is the demand, and that's really across the board in all of our verticals that we're seeing. I will tell you, payoffs for the industry remain pretty steady, and we'll see the same thing in the fourth quarter. But in terms of the demand and the outlook going forward, that's where we really garner most of our optimism as we look into the end of '25 and into '26. So all in, payoffs, it's just a necessary evil, if you will, but it's also a sign of a healthy market. So we continue to remain very bullish.

David Feaster, Analyst

Okay. Can you discuss the current competitive landscape? You've mentioned the disruptions and opportunities, but it seems that competition is intensifying when it comes to deals. I'm interested in the interaction between these dynamics and where you perceive competition is increasing. Is it mainly affecting pricing, or are you seeing changes in deal structures as well?

Palmer Proctor, CEO

It's primarily on pricing. And fortunately for us, we're accustomed to a very competitive environment with our footprint, a lot of it being in high-growth areas. But I will tell you, one of the mitigants to that, even though pricing will continue to be a pressure point, I think the disruption will help us in terms of garnering additional volume. So we are well positioned for that and ready to capitalize on any disruption that might come. So right now, at this stage, I don't see a whole lot of compromise on structure, which is good for the industry, but I do see a lot of pressure on pricing.

David Feaster, Analyst

And then just touching on the Equipment Finance side of the business. Could you touch on how production has been, how demand is trending there? And what segments of Equipment Finance you're seeing the most demand for? And then again, just any underlying credit trends within that business and some of the fee income opportunities that could come out of there as well? I know it's a lot, but just elaborate a bit on the Equipment Finance side.

Palmer Proctor, CEO

I’ll discuss the overall sentiment and then Doug will address the credit. I'm encouraged by the demand from small business operators, which appears to be increasing. We are very satisfied with our credit standards, as indicated by the declining charge-offs and non-performing assets. This is a positive sign for us moving forward while the economy remains stable. It reflects how well small business operators are doing at this point. Doug, would you like to elaborate on the credit metrics?

Douglas Strange, Chief Credit Officer

Yes, sure. Thank you. David, the credit box, we retooled that at the end of '23 and into '24. And I think we have it about right now where we want it, and we've seen very good results, and we've seen charge-offs over the recent quarters kind of right in that target zone that we were looking at.

David Feaster, Analyst

Okay. And then just the last part of that question was the fee income opportunities coming out of that business. You saw nice growth this quarter. Just curious some of the fee income opportunities you're seeing there.

Palmer Proctor, CEO

Yes, we experienced strong fee income in that sector this quarter, but I anticipate that it will moderate. You can expect about 75% of that fee income to remain consistent on a recurring basis moving forward. Additionally, we are excited about the increasing volume because we are finalizing plans to start securitizing that paper. This will enable us to boost production while still retaining some servicing and fee income. Therefore, we expect prepayment penalties, late fees, and other servicing-related income to be significant contributors to that line of business as we move ahead.

Operator, Operator

The next question comes from Catherine Mealor with KBW.

Catherine Mealor, Analyst

I wanted to start first on expenses. It was nice to see the decline this quarter, but I assume per your comment that the efficiency ratio will move up next quarter, that will probably increase next quarter. And so maybe kind of the big picture question on expenses is, can you talk about a good growth rate to think about for expenses going into next year just with loan growth being better? And then the second part of that is how should we think about how the mortgage expense line looks as mortgage revenue also increases next year? I noticed the mortgage comp line relative to mortgage revenue this quarter declined. And so I was just curious if there was anything going on that's run ratable if that's just a one-time event.

Nicole Stokes, CFO

Thank you, Catherine. I'll begin with general expenses. The efficiency ratio being down to 49% is mainly due to revenue, reflecting margin expansion and some growth in noninterest income. I don't believe expenses were excessively low. For next quarter, consensus estimates are similar to the third quarter, which seems reasonable. Looking ahead to 2026, I acknowledge your question about mortgage, and I will address that shortly. Regarding regular expenses, current consensus indicates a 5.5% increase, which seems justifiable. Salaries and benefits are expected to rise in the 4% to 5% range, with other expenses around 3%, and possibly some increased mortgage revenue or related expenses. Overall, projecting a 5% to 5.5% growth rate for noninterest expenses next year appears reasonable. On the mortgage expense front, if we see tenure decrease and experience strong momentum in mortgage production, additional mortgage expenses may arise. A practical way to assess this is through a specialized efficiency ratio for mortgages, currently at about 60% to 62%. As volume increases, fixed costs remain, while variable costs linked to compensation should bring this down closer to a 55% efficiency ratio. Therefore, I would suggest modeling future growth with a 55% efficiency ratio, if that's helpful.

Catherine Mealor, Analyst

That's great to hear. For my second question about margins, you've consistently exceeded our expectations this year, which is impressive. However, I understand you're anticipating a decline next year, and I appreciate that insight. Could you share your thoughts on the deposit side and where you see deposits heading? It might be helpful to discuss it in terms of a beta for the next 100 basis points and how that compares to the previous 100 basis points. This will help us understand the potential direction of deposit costs as we approach rate cuts.

Nicole Stokes, CFO

Absolutely. My margin guidance has indicated compression for several quarters, and while we haven't experienced it yet, I can say that it's starting to happen. This observation is based on a couple of factors. First, our deposits have repriced a bit quicker than our loans, and as they begin to catch up, the Fed's actions have also contributed to this lag. Every time the Fed lowers rates, it tends to extend that lag, which leads me to believe that some compression is inevitable. The second factor relates to the competition on the deposit side. Many institutions are now competing for asset growth, which necessitates funding. We're beginning to see this competitive pressure in our retail CDs. For example, in the fourth quarter, we have nearly $1 billion of CDs maturing at a rate of 3.71%, while our third quarter production for CDs is at 3.89%. This is the first instance where the previously favorable trend in CD rates might shift toward a disadvantage due to competition. However, our overall growth remains beneficial to the margin, primarily driven by the increase in noninterest-bearing deposits. With our loan production at 6.77% and an interest-bearing deposit rate of about 3.52%, the growth in noninterest-bearing deposits transforms our position from potentially dilutive to accretive regarding margin. The key question now is whether we can continue to grow noninterest-bearing deposits. If we succeed in this, the margin compression will be manageable. Nonetheless, we remain focused on growing our net interest income, so even with some margin compression, I expect our net interest income to continue its upward trajectory.

Operator, Operator

Next question comes from Russell Gunther from Stephens.

Russell Gunther, Analyst

I wanted to follow up on loan growth commentary here on the mid-single digits. Just curious in terms of a potential upside scenario given the strength of your markets and considerable dislocation occurring within them. Is there a scenario where we could start to see that begin to accelerate next year from kind of the mid- to the high single-digit rate?

Palmer Proctor, CEO

That's certainly what we hope for and would like to anticipate. The most important aspect is being in a position to take advantage of that, which we are. This gives us confidence in our capability to grow from mid-single digits to upper single digits or possibly even double digits. We are used to achieving a 10% growth rate in a healthy environment. It does depend on the macroeconomic factors and what happens there. However, if conditions improve as we are starting to see in areas like foreign trade, tariffs, employment, and GDP, there could be a significant opportunity for elevated loan growth. If we combine that with market disruptions, it represents a major opportunity for us in our key markets. As I mentioned previously, we are in the optimistic camp and not just cautiously optimistic, but genuinely optimistic about the outlook ahead.

Russell Gunther, Analyst

And then kind of in that scenario or perhaps maybe more near term, how should we think about the size of the investment portfolio going forward?

Nicole Stokes, CFO

Our investment portfolio has decreased to about 3%, but we have now increased it to approximately 9.3%. We aim to reach between 9% and 10%, which is very close to where we want to be. We could potentially add another $175 million to reach the 10% target, as that is where we feel most comfortable. We appreciate having the flexibility to focus on deposit growth because if we can increase deposits, it gives us options for both loans and securities.

Russell Gunther, Analyst

Got it. Okay. And then I guess just last one for me, maybe going back to the optimism around organic growth. Given that opportunity set, is there anything from an M&A perspective for depositories on the buy-side front that makes sense for you guys? Or is the organic, again, opportunity set sort of more of a priority at this point?

Palmer Proctor, CEO

I would tell you it's even more of a priority now the organic piece of it, just given the new opportunities with disruption. I think it would be a mistake for us to get distracted at a time where we've probably got far more opportunities organically going forward as we look out than getting distracted by an M&A deal.

Operator, Operator

The next question comes from Stephen Scouten with Piper Sandler.

Stephen Scouten, Analyst

I appreciate the optimism surrounding loan growth. I'm curious about how much of that optimism might stem from potential additional hires. I believe you hired 64 new lenders year-to-date last quarter, but I realize you usually refer to that number in both net and gross terms. I'm interested in understanding the scale of that opportunity and whether it's a significant focus driving your organic growth optimism.

Palmer Proctor, CEO

Yes. Our focus has been and will continue to be on attracting customers rather than relying on bringing in entire teams to achieve that. This is largely due to our strong presence in the markets experiencing disruption. While we remain open to seizing opportunities to add talent as it becomes available, we are equipped with the necessary talent to implement our growth strategy and are continuously evaluating the skills of our team. This year, we have seen a net increase of three individuals in the commercial group, including ten new commercial hires. It's crucial to focus on the quality of new hires, not just the quantity. By maintaining this approach, we can avoid potential challenges in the future. We are well-positioned to take advantage of the opportunities available with our current team, but we will also consider selective opportunities to bring in new talent, though we are not reliant on that for our future success.

Stephen Scouten, Analyst

Got it. Appreciate that. And then you guys are kind of in a lot of ways, in my mind, like tip of the spear around mortgage activity and inflection points. I'm wondering what you're seeing given where the 10-year has been moving and if there's any point where you think we could see a greater inflection around mortgage demand, both on the purchase side and the potential for a pickup in refinance activity?

Palmer Proctor, CEO

We certainly hope so. And I think things are moving in that direction. Our applications are up tremendously. And I think people are realizing that it may move that direction. But I think if we can get down, if we talked about last time, something with a 5 handle on it in terms of the 30-year, I think you're going to see an accelerated activity in the industry in the mortgage space. And once again, we're well positioned to capitalize on that. We've got a lot of heavy purchase volume right now. But I think that if we start seeing some improvement in the 10-year that will definitely be a tailwind for us as we look into the end of this year and into 2026.

Operator, Operator

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

Palmer Proctor, CEO

Great. Thank you. I want to thank our teammates again for another outstanding quarter. We remain focused on producing top-of-class metrics, maintaining our strong core deposit base and growing our tangible book value per share. The bank remains well positioned to take advantage of future growth opportunities and disruption in our attractive Southeastern footprint. We appreciate your interest in Ameris Bank. Have a great day.

Operator, Operator

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