ABCB - NASDAQ

Hello, everyone, and thank you for joining the Ameris Bancorp Third Quarter 2022 Conference Call. My name is Darius, and I'll be the operator for today. [Operator Instructions]. I now have the pleasure of handing over to your host, Nicole Stokes, Chief Financial Officer. Please go ahead, Nicole. Nicole, you may begin.

Thank you, Darius, and thank you to all who’ve 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 by Palmer Proctor, our CEO; and Jon Edwards, 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 it up for the 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.

Thank you, Nicole, and good morning to everyone. Thank you, again, for taking the time to join our call today. We had a strong third quarter, and I'm proud to be able to share some of the results with you here today. We reported net income of $92.6 million, or $1.34 per diluted share, and $91.8 million, or $1.32 per diluted share on an adjusted basis when you exclude this quarter's MSR recovery. These adjusted results represent a strong 154 return on average assets, and 18.33% return on tangible equity. We had another solid quarter of revenue growth, where net interest income increased over 11% from last quarter to this quarter, the second consecutive quarter. Our net interest margin improved by 31 basis points to 3.97. We continued to deploy excess liquidity into the loan and bond portfolio, while also protecting our deposit franchise. We improved our deposit mix once again this quarter and now, non-interest-bearing deposits are representing almost 43% of total deposits. Our revenue growth, in addition to discipline expense control, resulted in an improved efficiency ratio of just over 50% for the quarter, and we're now at 53% efficiency ratio for the year, which is exactly in line with 52% to 55% that we had previously guided. And all this revenue growth and operating efficiency has certainly been accretive to capital. We grew tangible book value again by over 10% annualized this quarter to end at $28.62 per share. And for year-to-date, we've grown tangible book value by $2.36, or over 12% annualized. So, we continue to deploy excess liquidity. So, while total assets remained fairly consistent for the quarter, our earning asset mix actually improved. We invested approximately $300 million into our bond portfolio, and organically grew loans by $1.2 billion during the quarter. For the year-to-date, we've grown our bond portfolio by $713 million, and reduced our mortgage loans held for sale by $957 million. We stated the previous quarters that our strategy was to use our mortgage loans held for sale in lieu of buying bonds at previously anemic rates that would negatively affect our capital when rates increased, and that's exactly what we did. Retail mortgage origination PP&R has now normalized below 3% of total PP&R, and therefore any perceived overreliance on mortgage should be eliminated. On the credit side, overall credit quality remains very strong. We recorded a $17 million provision for credit losses expense this quarter due to our strong loan growth and updated economic forecast. For our annualized net charge-off ratio, it's 11 basis points of total loans for the quarter, and our non-performing assets as a percent total assets, was adjusted 55 basis points. And as you can tell, we remain focused on a lot of fundamentals here regardless of what the economic landscape is, and I think this quarters a clear example of that and also the hard work our teammates have put forth to achieve the results that you saw for the quarter. And this Ameris team, when you think about it, has really built an extremely solid deposit base, low deposit betas, strong loan growth, solid asset quality, diversified income streams, with no dependency on any one vertical, and obviously top tier performance metrics. I'll pause there now and turn it over to Nicole for more detail.

Great. Thank you, Palmer. As you mentioned, for the third quarter, we're reporting net income of $92.6 million, or $1.34 per diluted share. On an adjusted basis, we earned $91.8 million, or $1.32 per diluted share, when you exclude the servicing asset recovery, some hurricane expenses, and a small BOLI gain. Our adjusted return on assets was 154, and our adjusted return on tangible common equity was 18.33%. I was very pleased again this quarter with our increase in tangible book value. As Palmer mentioned, we ended the quarter at $28.62, an increase of $0.73 or 10.4% annualized. Also, this quarter, we had only $0.55 of dilution from the increase in unrealized losses on the bond portfolio, compared to $0.16 of AOCI last quarter. For the year-to-date period, we've grown tangible book value by $2.36 or 12% annualized. And our year-to-date dilution to tangible book from AOCI, has only been about 3.5%. Our tangible common equity ratio increased to 8.75 at the end of the quarter, compared to 8.58 at the end of last quarter. We continue to be well capitalized, and we feel comfortable with our capital and dividend levels. Our net interest income for the quarter increased $31.7 million over last quarter, and $61.3 million from the third quarter of last year. In comparison, our interest expense only increased $10.1 million this quarter compared to last quarter, and only $9.9 million compared to third quarter of last year. Because of that, our net interest income for the quarter increased $21.6 million, which was driven mostly in the core bank segments. Our net interest margin increased 31 basis points from 366 last quarter to 397 this quarter. Our yield on earning assets increased by 49 basis points, while our cost of interest-bearing liabilities increased by just 34 basis points. About 20 basis points of that 31-basis point margin improvement was from the deployment of excess liquidity into higher-earning assets, and then the remaining 11 basis points of expansion was due to what I would call true core margin growth. In very simple terms, about 31 basis points of loan yield improvement, offset by 20 basis points of deposit costs. I mentioned at the end of the second quarter that we were slow to increase deposit costs in 2Q, and that our first raise went into effect the last day of the quarter. Due to competitive pressures, we've been a little bit more aggressive with raising deposit costs, in addition to that late 2Q raise, as the Fed raised rates this quarter, but we're still below our model deposit betas. Our cumulative deposit beta this year has been about 10%, compared to a modeled beta of 23%. We do anticipate additional deposit cost as the Fed continues this cycle and as competition continues to increase. However, even with this anticipated expense, we continue to be asset-sensitive, with NII increasing about 3% in an up-100 environment. And we've updated the interest rate sensitivity information on Slide 11. Non-Interest income decreased $18.3 million this quarter. We recorded a $1.3 million servicing rate recovery, compared to $10.8 million last quarter. So, excluding that MSR activity, our total non-interest income decreased $9 million, all in the mortgage division. This represents about a 20% decline in mortgage revenue, as production declined to $1.3 billion, and the gain on sale margin declined to 2.1%. Expenses in the mortgage division declined by $6.6 million, or about 14%, and that represents about 68% to 70% of the revenue decline due to the variable expenses within that division. Purchase business has returned to historic levels, at about 85% to 90% of total activity, and we're prepared for continued success at our pre-pandemic and pre-refi boon levels. Just to emphasize what Palmer said earlier, retail mortgage originations as a percentage of our pre-provision pre-tax income, really continue to normalize, representing just 2.3% of the total this quarter. Non-interest expense decreased $2.6 million this quarter. As I just mentioned, expenses in the mortgage division declined by $6.6 million. So, excluding the mortgage division, non-interest expense increased about $3.5 million, the majority of which were compensation benefits, including incentives, benefits, and wage inflation. This represents about a 4% increased expense, but compared with the 15% increase in NII, we had our efficiency ratio continue to improve, reaching a low of 50.06% for the quarter, and that brings us to 53.44% for the year. We continue to look for expense reduction opportunities, and we anticipate an efficiency ratio same guidance as before in that 52% to 55% range going forward. On the balance sheet side, assets were relatively flat at $23.8 billion, compared to $23.7 billion last quarter. We deployed the remaining $1.4 billion of excess liquidity into higher-earning assets to include about $300 million in the bond portfolio, and $1.2 billion of organic loan growth spread among really all categories of our loan portfolio, as you can see on Slide 16. We were pleased with the loan growth this quarter and underlying credit of those loans. Due to the softening market conditions and reduced pipelines, we do not anticipate the same level of loan growth in the next few quarters. While 2022 loan growth is going to come in higher than we originally guided because of the remixing of the balance sheet and the excess liquid deployment, we do anticipate 2023 loan growth to continue to slow and kind of be more in line with our prior guidance of upper single digits, that 7% to 9% window. Total deposits decreased by $218 million or about 1% during the quarter. However, we grew non-interest-bearing deposits by $80 million, and some of our higher cost interest-bearing deposits we ran off, declined about $298 million. The change in deposits is such that our non-interest-bearing deposits are now 42.86% of our total deposits, almost 43%. And our total non-rate sensitive deposits, that includes non-interest-bearing now and savings, they represent over 66% of our total deposits. This mix will certainly continue to help our deposit betas as we move through the cycle. And with that, I'll wrap it up by just reiterating how proud I am of our team. We've remained disciplined and focused on operating performance as we move forward. I appreciate everyone's time today, and I'm going to turn the call back over to Darius for any questions from the group.

[Operator Instructions] So, the first question comes from Kevin Fitzsimmons from D.A. Davidson. Please go ahead, Kevin.

Hey, good morning, everyone. Just on that - one of those last comments you made, Nicole, about the pace of loan growth and I guess slowing or normalizing to upper single digits, can you just kind of parse that out a little for us in terms of, is that maybe retaining less mortgages? Is it just anticipating or already seeing pipelines slow, or is there deliberate tapping of the brakes on certain segments? And maybe particularly if you can address Balboa. Just wondering like what are the components kind of driving that more normalized growth from what you saw this quarter? Thanks.

Absolutely. If there was an option C, three of the four, that would probably be the way that I would answer that. So, it is a - we do anticipate - so a couple of things. One, our pipelines are down at the end of the third quarter, and we anticipated that. So, our pipelines are down, so that is part of it. We also - the growth that we anticipate next year, we do anticipate that kind of across all metrics. So, we do see the portfolio mortgage slowing down as well. So, not having - I know last quarter we put $500 million. This quarter we did about $300 million. So, we do anticipate that slowing kind of going into the fourth quarter and first quarter. Those are typically slower quarters anyway for loan growth. And then you add the market softening on that a little bit. But we do still see that loan growth in the upper single digits, and we really see it balanced. That's one of the things that we like about our balance sheet, is all the diversification and the opportunities that we have. So, we - between CRE and construction slowing a little bit, but then we still have Premium Finance, and we still have - we do have the mortgage and we have Balboa. So, all of that combined, we continue to look for diversified growth going into next year.

And how about Balboa in particular? Are they in the same kind of thought in terms of slowing, or would you expect them to stay strong?

We expect them to kind of continue to grow at the same pace that they're growing. Just for perspective, at the end of the second quarter, they were at 4.7% of the total portfolio, and they, at the end of the third quarter, were about 4.8%. So, they are growing just directly in line with the size of the bank as we expected.

Got it. Okay, great. Maybe one quick follow up on the margin. You mentioned how last few quarters have been very impressive expansion and - but you alluded to the fact that deposit costs, deposit beta is probably accelerating from here. Maybe just help us with the trajectory of the margin looking ahead. A lot of banks have alluded to maybe there's further expansion, but not at the pace we saw this quarter. Just wondering if it - what kind of expansion is out there and do we plateau in some point in ‘23? Any kind of help on that front? Thanks.

Sure, absolutely. And you’re exactly right. So, we remain asset-sensitive. We're about 2.93% asset-sensitive. And if you look back to where we were at the beginning of the cycle, we were closer to 7%. So, we've purposely tried to get our balance sheet to become closer to neutral, and we're working that way down. Looking forward, every 25-basis point of rate hike is about three basis points based on the way we have it modeled. So, anticipating a 75-basis point rate hike in November, you would expect our margin to increase five to seven basis points, and that's being pretty aggressive with our deposit betas. As I said on the call earlier, we've only had about a 10% cumulative deposit beta, compared to a 23%, where we modeled that at 23%. Our money markets accounts, we modeled it at 55 beta, and those have been coming in closer to 25. And so, we certainly have some room to be a little bit more aggressive to be able to retain those deposits as needed. However, so we - so again, kind of looking at margin going forward, we continue to be asset-sensitive for at least the next two quarters, and then depending upon what the Fed does in December and how lagging our deposit betas are going to be. But we do continue to see some margin expansion at least for the next two quarters.

Great. Thanks, Nicole.

The next question comes from Brady Gailey from KBW. Brady, you can speak now.

Good morning, guys. Maybe just to keep with that train of thought, so I guess the margin's up for the next couple of quarters with your asset sensitivity. It feels like betas will rise. Like, does the margin plateau as we get to mid next year and stay flat, or do you think there could be some downside just as the funding side kind of outpaces the asset side?

Brady, you know, I typically don't like to give guidance out more than two quarters, so I don't want to extend too much, but I think your thinking is right. You do have to remember how much of our balance sheet on the loan side is variable rate versus fixed. And even though when you look at kind of straight call report beta, and we look kind of in that very heavy on fixed rate, there's a large portion of our portfolio that reprices on short term basis, our construction book. Our Premium Finance book is about a 10-month duration. So, even though it’s technically a fixed-rate loan, it's going to reprice. So, we're a little bit more asset-sensitive on the loan side from a variable rate perspective. So, I think the big wild card in all of this is the deposit side. And we do anticipate, if the Fed stops increasing, let's say they go November and December and then they pause, will our loan side continue to reprice probably as fast as what potentially the deposit side. If they raise and then they halt for any long period of time, how long will that deposit lag take? And so, that's really the question. So, if we're thinking about a two raise in the fourth quarter and then a lag for a long period of time, I think there is an opportunity for the margin to kind of stabilize. However, if there's a very short lag before they start declining as we are moving our balance sheet to become more asset-neutral, we're preparing ourselves for that. So, is there an opportunity for it to maybe kind of taper out after that second quarter guidance and taper out maybe in the third or fourth quarter? I think that is a possibility, but I really don't like to give too much definitive guidance after that, because there's so much deposit behaviors that could alter that.

Yes, that's fair. All right. And then my next question is on the expense side. Ameris has seen great expense containment. I know mortgage come down is helping on that effort, but how do you think about wage inflation and the pressure on expenses going forward? I mean, you printed a 50% efficiency ratio. You're saying that's probably too low longer term, but how do you think about the expense side going forward into ‘23?

Yes, and we did have that increase this quarter excluding mortgage, and the majority of that was salaries, benefits, incentives. It's compensation. We definitely see the wage competition. And so, that will certainly increase. We continue to look for ways to self-fund that, and not only the wage side, but also technology is one of the things that really has driven our really diligent expense control is that we use - we are looking for ways to use technology. And when we look at how we're deploying our technology costs, we're looking - really looking at, is this a cost save or is this a revenue driver? And there's obviously some technology that we have to deploy just to stay current. But we really do use that reallocation of resources. I do anticipate expenses, and I think this is already built into the Street consensus for next year. But expenses could increase a little bit more kind of going into next year just through wage inflation.

Brady, this is Palmer. One other thing to remember, we reiterated it several times is that, when you look at our growth and the expectations for our growth, it is not predicated on having to go out and hire a lot of new talent. And there are many banks that are out there right now that are actively having to recruit. We've already absorbed all those expenses and all of those costs. So, anything we really feel is more along the lines of just normal wage inflation. And I think as we get back to a tighter labor market, that should reduce some of that increase in the expense because it becomes obviously competitive now to retain talent, but at the same time, we are not in a position we're having to go out and acquire talent to hit our objectives.

Yes, that's a good point. And then finally for me, the gain on sales spread and margin took another step down here to 210 basis points. Any insight on when those spreads could start to recover?

I'd say that's really predicated on the Fed because when you look at right now, and you can see it in the NDS market too, the desire to buy mortgage has tapered off primarily because a lot of people are anticipating the fact that rates are going to be pulled back down next year. I think that's a bit premature personally in their thinking, but if they do, then they're going to refinance. And so, when they refinance, there's less value or margin on those particular loans. I think that's more the psychology of it at this stage, just based on the Fed's actions.

All right, great. Thanks, guys.

The next question comes from Jennifer Demba from Truist Securities. Please go ahead, Jennifer.

Thank you. Good morning, everybody. A question on asset quality. It still remains terrific. Palmer, what do you see as a normalized level of annual loan losses for Ameris at this point?

Jennifer, this is Jon. I'll answer that. So, the annualized - even though it was up a little bit this quarter and not that materially, it annualizes eight points. Going into next year and having a little softening, it certainly is going to be up from the last three or four years of historic lows. I don't necessarily have a forecast number to give you, but I mean, you can estimate it to be a little bit higher. Part of that is you see us and the rest of the banking industry sort of taking the initiative on reserves to kind of build an anticipation about that. So, I think this year's still going to finish out probably in a pretty abnormal low number, but I think you could start seeing it normalize again.

What loan buckets are you most concerned about?

I would tell you, it's not so much buckets as it is particular asset classes perhaps, and not a concern so much from our portfolio as it is that when we look at that lending on a go-forward basis, is making sure we've got a focus on companies that have operating cash flow, more C&I lending. Obviously, office is a big concern for everybody as we go forward. So, I think there's certain verticals like that that we pull back on intentionally. But in terms of entire bucket, we really don't have that. I mean, oftentimes we look at predictors out there, and one of the questions that comes up often is Balboa Capital. And when I look at the asset quality there, it's held up better than we had anticipated, but then again, the FICO scores there continue to inch up and the performance is still solid. So, we do watch that one because I think it's a good predictor when you're looking at smaller businesses. But all in all, we feel pretty good and don't see - like a lot of people, don't see any cracks anywhere, but that doesn't mean we aren't being very cautious.

Thanks.

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

Hey, good morning, everybody. Maybe just following up on the asset quality side, we saw a modest uptick in criticized and classified, and it looks like Balboa's ratio has actually improved quarter-to-quarter. Just curious what you're seeing there. It looks like it might be resi mortgage-driven, but just was hoping you could touch on that a bit and give us some color there.

Well, David, this is Jon. So, really the uptick - well, a couple of things when you - I guess we reference that really on Slide 20. The uptick, because of our increase in loan balances, our classifieds on that chart on Slide 20, it's still about the best it's been in the five quarters that we're reflecting on that. Our classified to capital number is still low. And so, that uptick was really limited to just three borrowers primarily. And so, it's not widespread. It's just really companies that I anticipate will probably improve over the next couple of quarters, and aren't really long-term watchlist sitters, but just because of some numbers I saw this quarter, I felt the need to put them on the watch list. But I didn't really look at them as kind of long-term issues for us. So, the numbers are still good. Our criticized number is better than it was last year at this time, and our classified numbers stayed pretty low. So, overall, asset quality is still, I think, pretty solid

Was there any commonality among those three borrowers, or are truly idiosyncratic?

Commonality, I guess would be in the mortgage warehouse. They were all mortgage warehouse borrowers. And frankly, they just hadn't sort of downsized their operations to reflect the current market conditions in mortgages. But it is no way really impacted our borrowing with them because we have $300,000 average mortgage loans that still pay off within 20 days of being on the line. So, not really an impact to our operations, but just waiting for them to kind of react better and to the current market is what I was really looking for.

Okay, that makes sense. And then maybe, I was hoping we could touch maybe on the funding side and how deposit flows are trending. We're kind of at the higher end of where you historically operated from a loan to deposit ratio. But just curious how you think about funding? And I mean, look, the non-interest-bearing deposit growth was great to see this quarter. Just curious again, how you think about funding. And then could you maybe touch on the drivers of the borrowings this quarter, just given the robust cash balances you already have. Just curious on that as well.

Sure. David, you're right. And just as a reminder to everybody, we do have cyclical public funds that typically come in in the fourth quarter and they stay. So, when you look at a year-end balance sheet, we typically have elevated deposits. So, we do anticipate that coming in, already starting to flow in and continue to come in November, December. And then that'll continue kind of through the first quarter before that runs out. That's a normal cyclical with our public fund. So, we see some funding coming in that way for the fourth quarter. But then we also - we continue to be very diligent on the deposit side and the funding side, and our focus has really been growing core deposits and relationship banking, and it's been that way. We did an analysis recently where we looked at kind of our open accounts versus peers, and the short version is that during the pandemic, we didn't stop. We had branch managers meeting customers in parking lots in their cars six feet away, and we continued to open accounts and sell deposits, and we didn't shut down to the pandemic. And we're kind of reaping some of those benefits today with our core deposits. We did have some borrowings, as we are very much watching our liquidity ratio. Just - everybody talks about a potential capital downturn, and you see some liquidity, some other banks having tremendous outflows of deposits. So, we're very cognizant of that. So, we are trying to keep our liquidity in a certain level by our choice to do that. And so, we did go out and get some short-term borrowings to kind of help that, knowing that we have some cyclical funds coming in. And then we also, again, I want to reiterate our bond portfolio, that you can look back kind of in 2019, our bond portfolio was close to 10% of our earning assets. And you look at us today, we're about 5.5%, 6%. So, when people kind of look at our loan to deposit ratio, you have to remember that we don't have - as a percentage of earning assets, our bond portfolio is much smaller than some of our peers. So, we've deployed some of that through the balance sheet and through loans as opposed to the bond portfolio, and we anticipate that leveling out over the next couple of quarters as well.

That's a good point. And then maybe last one, just touching on Premium Finance, had a strong quarter, and that's a segment that doesn't get much attention. Was hoping you’d maybe just touch on some of the trends there and what's driving the strength and any expectations for the Premium Finance side going forward.

Yes, we continue to see that just being a good steady performer. And when you think about that business and the premiums associated with it, and the customer base associated with that, that doesn't really change. And obviously, from a credit risk standpoint, it's got very minimal risk as you're dealing with - we have upfront premiums that are paid for us that we have in reserve. So, from an asset quality standpoint, it's solid. From a production standpoint, it's solid. What we're hoping there, we've seen a lot of consolidation in the industry, and what we're hoping to do is actually garner a little more market share. So, that's the big focus for 2023. So, we might see some moderate increases in Premium Finance. But right now, it just continues to be and deliver on a very steady basis.

That's great. All right. Thanks, everybody.

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

Thanks. Good morning. Just wanted to follow up on a credit question related to Balboa. As we think through the cycle, how could the risk-adjusted returns evolve as rates go full higher and perhaps charge-offs could tick up? Do the two kind of offset each other, or do you see some compression in the kind of risk-adjusted Balboa over time?

Chris, this is Jon. So, the production yields will follow up with the rate environment. So, the charge-offs running in better than what we anticipated this time last year when we were kind of forecasting it out. I think those will kind of work in lockstep together, as you kind of mentioned there.

Great. So, the impact on margin in the long-term is still as good if not better than as you thought about it last year?

Yes.

Great. Okay. And then just a follow-up for whomever wants to take it on, just deposit generation outside of the traditional bank channel, are there opportunities still in the mortgage area in Premium Finance and in other relationships that you've brought to Ameris over the last several quarters?

Yes, that's a good question, Chris, and it's something that a lot of banks have struggled with out of their - kind of their non-core lines is, how do you generate deposits and relationships out of those more transactional - typically transactional oriented models? And what we have seen and what we're trying to do right now on several fronts is focus in on that with a lot of direct marketing. So, we'll be doing a lot of that next year to capitalize on it. But one of the things when you look next year through our hiring process, if you will, the majority of the new hires that we have budgeted, which will probably reallocate some resources to accommodate the expense for it, is on the treasury management side. We're doing a lot more on treasury management. So, that will probably be the bright spot for us as we go forward next year with deposits. And as you know, those are stickier deposits, more focused on our C&I customer base, and we've had some wonderful opportunities there with new hires as of recent. And more importantly, the results are reflecting that initiative. So, that is a big push for us next year. And so, we've got some expense associated with additional hires throughout the network for that. But I think that's probably where we're seeing most of the lift next year, but we'll still continue to try and penetrate the Balboas and the mortgage operation for deposits. And right now, mortgage does a fairly good job of bringing in deposits, because we've got a lot of escrow and tax money obviously that comes in. And that's - it's a seasonal type of approach because obviously, it goes out to pay insurance and taxes. But they've developed a lot of relationships with our warehouse borrowers and the wholesale lending, in addition to all the tax payments insurance payments that come in. So, but there's a lot of more opportunity there, especially in footprint.

Great. That's helpful. Thank you for that background. And then, Nicole, just a quick reminder on the public deposits, do those tend to have lower betas over time?

They can - there's a blend of those And so, the average blend is about accurate to what our historical has been. Yes, it's about average.

Great. Thanks again for all the time this morning.