Ameris Bancorp Q4 FY2022 Earnings Call

Hello everyone and welcome to the Ameris Bancorp fourth quarter 2022 conference call, and thank you for standing by. My name is Daisy and I will be coordinating your call today. If you would like to register a question, please press star followed by one on your telephone keypad. I’ll now hand over to your host, Nicole Stokes, Chief Financial Officer to begin. Nicole, please go ahead.

Great, thank you Daisy, 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 Jon Edwards, our Chief Credit Officer. Palmer will begin with some opening comments and then I will discuss the details of our financial results 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 these factors that might cause results to differ in our press release and 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.

Thank you Nicole. Good morning everyone. I appreciate you taking the time to join our call today. We were very pleased with the financial results we reported yesterday, and I’m also excited to be able to share some of the financial highlights in addition to our overall strategic view, before Nicole gets into some of the details. For the fourth quarter, we reported net income of $82.2 million or $1.18 per diluted share, and for the year we earned net income of $346.5 million or $4.99 per diluted share. We had another quarter of margin expansion where our margin improved by six basis points to just over 4%, and then our net interest income increased over 5%. One of the metrics we’re really proud of is for the full year of 2022, our growth in net interest income was over $145 million and more than replaced the decline in revenue that we experienced from the mortgage industry refi boom and the PPP income from 2020 and 2021. As a company, our pre-tax, pre-provision increased 13.9% in 2022 to $524.8 million from $460.7 million in 2021. This resulted in a PPNR ROA of 2.22% for 2022 compared with 2.11% in 2021. This revenue growth and our disciplined expense control improved our overall operating efficiency to 49.9% this quarter and 52.5% for the year. As for capital, our capital position remains strong. Our PPE ratio was 8.67 at the end of the year, and we’ve consistently said we’re focused on tangible book value growth which we believe is a main driver for building shareholder value, and we grew tangible book value this year by 13.9% to end at $29.92 per share. On the balance sheet side of things, we’re pleased with our loan growth as well as our deposit balances. Loans grew over a billion dollars during the quarter, which includes an asset purchase of approximately $472 million of cash value life insurance-secured loans. Excluding this purchase, organic loan growth was $576 million or 12% annualized for the fourth quarter. Our full year 2022 organic loan growth was $3.5 billion or 22%. We continue to anticipate 2023 loan growth to moderate but are still guiding, though, in the mid single digit loan growth for 2023. The total deposits were relatively flat for the quarter and ended at $19.5 billion compared to $19.7 billion last year, and our total non-interest bearing deposits still represent about 41% of our total deposits. We’re going to continue to work diligently to protect these relationships, and we still have less than 1% in broker deposits or brokered CDs. On the credit side, overall quality remains strong. We recorded a $33 million provision expense this quarter due to loan growth and our updated economic forecast, and none of this provisioning expense was due to credit deterioration. Our annualized net charge-off ratio improved to only 8 basis points of total loans for the quarter and the year, and our non-performing assets excluding the Ginnie Mae guaranteed loans as a percent of total assets was 34 basis points. Our allowance coverage ratio excluding unfunded commitments improved to 1.04% at the end of the year. To summarize, while the economic outlook seems to change daily, we’ve got strong fundamentals and we’re prepared for 2023, and I say this for several reasons. First, when you look, we have a slightly asset sensitive balance sheet that’s going to help protect us and protect the margin throughout the next few Fed hikes. We also have a strong core deposit base. As you know, with deposit betas are better than modeled, we’re going to continue to target a pre-tax, pre-provision ROA greater than 2%, as it was 2.2% this year, as I mentioned earlier, and we’re also projecting an ROA in the 1.30 to 1.40 range and an ROTCE above 15%. What drives a lot of this is our culture. We’ve got a strong culture of expense control and expect to maintain a sub-55 efficiency ratio. We’ve got a diverse revenue stream among other lines of business and geography with over 73% of our net income coming from the core bank segment, and we’re going to continue to accrete capital and we expect to have double-digit tangible book value growth. Last but not least, when you look at how we’re positioned in terms of our markets and our experienced bankers, there’s no reason why we can’t achieve what I just mentioned. I’ll stop there and turn it over to Nicole and let her discuss the financial results in more detail.

Thank you, Palmer. For the fourth quarter, we reported net income of $82.2 million or $1.18 per diluted share. When excluding the MSR gain for an adjusted total, we earned $81.1 million or $1.17 per diluted share. Our adjusted return on assets for the fourth quarter was 1.32, and our adjusted return on tangible common equity was 15.78. For the full year 2022, our net income was $346.5 million or $4.99 per diluted share. On an adjusted basis, we earned $329.4 million or $4.75 per diluted share, resulting in a full-year ROA of 1.39 and ROTCE of 16.92. We concluded the quarter with tangible book value at $29.92 per share, an increase of $1.30 this quarter. Over the year, our tangible book value grew by $3.66, almost 14%, starting at $26.26 and ending at $29.92. Regarding net interest income and margin, our interest income for the quarter rose by $39 million compared to the third quarter and increased by $95 million when looking at the fourth quarter from last year. In contrast, our interest expense increased by only $28 million this quarter versus last quarter and by $38 million compared to the fourth quarter last year. For all of 2022, interest income grew by $191 million while interest expenses rose by $45 million, leading to a net increase in net interest income of approximately $146 million or just over 22% year-over-year. It’s essential to note that this included the effects of the PPP run-off. In our core bank segment, net interest income surged by $188.7 million or 41.2% this year, driven by both asset growth and margin expansion. Our margin increased by 6 basis points this quarter, from 3.97% last quarter to 4.03% this quarter. The yield on earning assets rose by 54 basis points, while the total cost of deposits increased by just 39 basis points. Due to competitive pressures, we have raised deposit rates aggressively this quarter but remain below our modeled betas. Our cumulative deposit beta this year has been around 15% against an original model beta of 23%. We remain asset-sensitive, with net interest income expected to increase by about 2% in a 100 basis point hike environment, and we've updated the interest rate sensitivity information on Slide 10. Non-interest income for the quarter showed a decrease of around $17 million, with $14.6 million stemming from the mortgage division. Our mortgage team effectively managed to lower expenses as production declined. Expenses in the mortgage division dropped by $7.3 million, accounting for 50% of the revenue decline due to variable costs. Purchase business steadied this year at about 82% of total activity, and we’re well-equipped for future success at pre-pandemic levels. Total non-interest expense declined by $4.5 million in the fourth quarter. We are committed to enhancing our operating efficiency. Our adjusted efficiency ratio improved to 49.92% this quarter from 50.06% last quarter, and for the entirety of the year, our efficiency ratio stood at 52.54%, down from 55% the previous year. We continue to explore opportunities for expense reductions. Although we typically see a first-quarter bump due to cyclical factors, we believe we can maintain an efficiency ratio in the low 50s next year, even with slight increases in non-interest expenses. On the balance sheet, we ended the year with total assets of $25.1 billion compared to $23.8 billion last quarter and $23.9 billion last year. We were pleased with our loan growth of $576.1 million or 12.25% annualized for the quarter, totaling $3.5 billion or 22% for the full year. We expect loan growth to continue in the mid-single digits for 2023. Total deposits remained relatively flat at $19.5 billion for the quarter, with non-interest bearing deposits still representing over 40% of our total deposits, specifically 40.74%. Including non-interest bearing deposits in savings, our total non-rate sensitive deposits comprise over 65% of our total deposits, with less than 1% being brokered, as mentioned by Palmer. I will now hand the call back to Daisy for any questions from the group.

Our first question today comes from Casey Whitman from Piper Sandler. Casey, please go ahead, your line is open.

Hey, good morning.

Good morning Casey.

Maybe first starting, Nicole, you mentioned, I think a 15% cumulative deposit beta versus your 23% model. Is it your expectation over the next few quarters that the beta will kind of grow towards that 23%, or has, I guess, your longer-term beta outlook come in a bit? Maybe just touch on where deposits costs were at the end of the quarter versus where they were over the quarter, if that’s gone up meaningfully or not.

Our original model beta was around 23, and our current model beta is about 21, which puts us below that. When considering the entire cycle, we are at approximately 15% compared to the original 23 and the current model beta of 21%. We remain slightly asset sensitive at about 2%. However, with each rate hike, we have noticed competitive pressure in the market, leading us to believe that margins are stabilizing or peaking at this time. Even though we have asset sensitivity, if the Fed raises rates next week and possibly one or two more times after that, we have the additional beta to help protect our deposits. Therefore, we expect the margin to be stabilizing or nearing its peak now.

Mm-hmm.

Then for spot deposit costs at the end of the quarter, I might need to get back with you on that one, Casey.

Okay.

I will say that with the latest move, it’s going to be in CDs, and our overall CD costs are fairly consistent with what we reported for the quarter. Our money market spot costs at the end of the year were about 2%, and now they’re about 1.53%.

Okay, I appreciate that. Maybe walk us through the strategy just with FHLB borrowings and, I guess, talk more broadly about total funding costs versus just deposit costs, and also your appetite for FHLB versus broker deposits and how it kind of applies to the loan growth guide and also the loan purchase this quarter.

Sure, when we acquired the loan portfolio, we were attracted to the credit quality, cash surrender value, and interest rate. In our modeling, we initially considered some wholesale funding. By the end of the year, our FHLB borrowings were at 1.5 billion, with a third of that amount allocated to fund the portfolio purchase, which contributes positively to our return on assets. The remaining borrowings, around 1 billion, are also from FHLB, and we assess those based on profitability, margin, and return on assets. If we had opted for brokered deposits instead of FHLB advances, we could have done so since our broker deposits were below 1%. That change would have decreased our loan to deposit ratio to under 95% as it would have increased the denominator. Our focus was on profitability, timing, and locking in favorable rates, which informed our funding decision.

Mm-hmm, okay. Just with the loan purchase, obviously you stayed within your credit. Just what kind of yields are in that book, and is the plan to add more to that, or is this sort of more one-time transactions?

This acquisition is part of a one-time transaction, but we already offer a product called cash surrender value secured. We appreciate the credit, as it is a variable rate product yielding over 6% with very low credit risk. We find all of this favorable, and it enhances the existing portfolio we had. We have purchased and integrated it into our core system, resulting in minimal overhead to maintain that product, making it accretive to return on assets.

Okay, thanks for taking my questions, and great quarter.

Great, thank you Casey.

Thank you very much. Our next question today comes from Brady Gailey from KBW. Brady, please go ahead, your line is open.

Hey thanks, good morning guys.

Good morning.

I wanted to start with mortgage - you know, another step down here in mortgage revenue in 4Q. I know it’s incredibly hard to forecast, and a gain on sale of 126 basis points is not helping you. But any way to think about what mortgage could look like in 2023 from a volume and a gain on sale perspective?

Yes, I’ll tell you what, Brady - I’ll kick off in terms of the outlook, and then I’ll let Nicole talk kind of on the gain on sale portion of it. I think what we’re all experiencing as an industry is really the mortgage space has obviously moved because of higher rates back more into a pattern of seasonality year-over-year, which is where we were pre-boom, pre-pandemic, so it’s kind of a nice shift, quite frankly, to level set and reset everything in the industry, but I think what you’re going to find across the board is that there’s going to be more seasonality that we were accustomed to. First quarter of each year is always typically the weaker quarter, and then second quarter generally picks up because of spring selling season, and then third quarter is typically your highest quarter, and then fourth quarter, assuming that rates kind of moderate, we’ll continue to see some improvement there. We think the Fed will have long term rates moderating probably around 2.6, 2.85 in the 10-year, bringing kind of long term rates to a steady 5% for Fannie and Freddie-type products into 2024. I think the outlook right now in 2024 is actually pretty positive for the housing market, so that’s kind of what I think we’re going to all experience, which we’re glad to see, it’s just some more moderation and getting back into that pattern of seasonality.

In terms of the gain on sale, Nicole, do you want to talk about that? Our gain on sale this quarter was 1.26, and we believe that it will definitely increase and stabilize. We initially projected around 2.75 to 3, although I can't specify when we will reach that point. I wanted to share some interesting insights regarding the mortgage segment. There was a lot of fluctuation in 2019, 2020, and 2021, so looking back at the fourth quarter of 2019—which is after Fidelity but before COVID and the boom—provides a good comparison. In that quarter, our production declined about 30% this quarter compared to the fourth quarter of 2019, but our profitability has significantly improved due to the efficiencies gained during the refinancing boom. The mortgage group's contribution to our net income was 19% in 2019 and is now 13%. They are maintaining efficiency and managing their performance well. If they can continue on this path and offset the loss in gain on sale, any improvement in gain on sale will be beneficial for us. For production next year, I estimate between $4.5 billion and $5 billion, likely $1 billion in both the first and fourth quarters, and about $1.5 billion in the second and third quarters, leading to that total. I wouldn’t want to suggest modeling a 1.26 gain; I hope it will improve somewhat this year, but I don’t expect it to reach the 2.75 to 3 range until the market stabilizes. I believe projecting around 2% for next year would be reasonable.

Okay, all right. That’s helpful. Then there’s a lot of focus on commercial real estate, and specifically in office. I know you guys give some good stats about your office investor-free portfolio, which is a little over $1.2 billion. Any other things you can talk about that - is that Class A, Class B, are you seeing any weakness there? Any updates you can give us on office CRE?

Our office portfolio primarily consists of three categories: essential use, which includes facilities needed for call centers or headquarters, medical office spaces, and credit tenants. We do not focus on CBD offices or generic two or three-story buildings. Our strategy revolves around these three categories. The slide indicates an NPA level of 70 basis points, which primarily stems from one loan we are currently addressing. This loan experienced issues starting in the second quarter of 2022, and we are actively working on a resolution. However, there have not been widespread issues in the portfolio so far.

Cash levels are decreasing. Currently, the cash to average earning assets ratio is around 5%, compared to 18% at the same time last year. Could you discuss your target for cash levels in the long term, specifically what the minimum should be, and how that might affect the bond portfolio? Given that you are still growing loans while deposits may remain flat, should we expect the bond portfolio to begin contracting in 2023?

Great question, Brady. Our investment portfolio represents about 7% of earning assets, typically ranging from 6.5% to 7%. It normally runs between 9% and 10%. We have been actively purchasing bonds, adding about $100 million each month in the fourth quarter, which has increased our bond portfolio. This relates to your cash question; we consider both our bond portfolio and cash. Unlike some of our peers, we don’t have significant unrealized losses in our bond portfolio, making it easily sellable with minimal impact on regulatory capital due to our AOCI position. We include both our securities and cash when calculating our liquidity ratio, maintaining it within the 10% to 12% range. Our minimum is between those two percentages. I anticipate our cash will remain around 5%, and depending on the bond market, it might stay at 7%, possibly increasing to 9%, although there’s considerable uncertainty in the market. Regarding our loan-to-deposit ratio at 102, I know it seems elevated. However, when accounting for loans plus investments, we are aligned with our peers since our investment portfolio does not have AOCI dilution and functions as a liquid asset. Some peers hold low-yielding bond portfolios which they cannot sell due to potential AOCI realization affecting their regulatory capital. We have strategically used our loans and loan purchases to balance the bond portfolio, viewing them together. On the liquidity funding side, we have minimal brokered CDs—less than 1%—and our FHLB borrowings are below 6%, providing us with sufficient liquidity room. If we hadn’t taken FHLB advances and opted for brokered deposits instead, our loan-to-deposit ratio would be below 95%, and it wouldn’t be as notable. Nevertheless, we manage our funding sources with a focus on profitability, return on assets, and margin.

Okay, that makes sense. Thanks guys.

Thank you. Before we take our next question, I would just like to remind everyone, to register a question, please press star followed by one on your telephone keypad. Our next question is from Christopher Marinac from Janney Montgomery Scott. Christopher, please go ahead, your line is open.

Thanks, good morning. Nicole, just to kind of continue on the same points you were making, what is the cash flow from the securities portfolio, and how much of your funding can you do internally just from that alone?

Give me a moment. I apologize for the silence. I want to ensure I'm providing you with accurate information. Chris, I'm sorry, I thought I had the correct figures readily available, and I don’t want to give you the wrong number, so I will follow up with you on that. However, I would say that any cash flows from the bond portfolio should be reinvested back into the bond portfolio to maintain that 7% target.

Okay, that’s helpful.

Yes, and because we had moved our bond portfolio down to less than 3% of assets and we’ve really added that bond portfolio back in over the last six to eight months, the cash flow on that is not as aggressive as you might expect.

Okay, not a problem. Thank you for that, that's helpful. Then outside of the purchase.

Sorry, I was going to mention, the duration on the portfolio is about three years.

Good, okay. Perfect. Then outside of the purchase portfolio on loans, is the pace of commercial loan expansion this year going to be similar to what we saw in the fourth quarter, or would that be different? You had a very successful last year from Balboa and all the other organic sources, so just want to kind of understand if that pace is similar or if it may slow down.

Sure, so we would consider growth kind of among the category split. We still see growth opportunities in CRE as well as our C&I, and as well as our premium finance, FDA. I mean, we really have it diversified across all of the verticals there.

Chris, one advantage of this cycle, if you want to view it positively, is that it has allowed banks to take a step back and be more selective, particularly in commercial real estate. By limiting our exposure to certain asset classes, we can concentrate on our priorities. We continue to emphasize deposits while also focusing on growth in commercial and industrial sectors, where we see promising opportunities. This growth in C&I will be robust, alongside our finance activities. We're also seeing significant deposits coming from operating companies, aided by our treasury management services, which has been a highlight. Our main priorities for 2023 revolve around deposits, particularly the importance of growing deposits. Our incentive plans reflect this renewed emphasis on deposits as part of our core funding strategy. Additionally, we aim to enhance small business growth in C&I and improve the customer experience. These three areas are our main focuses for the year ahead, and I believe they will position us well as we progress through 2023.

Great, I think you mostly answered my follow-up question. It was just to confirm that deposits can grow organically this year, which it sounds like they will.

Yes, that’s probably going to be one of the bright spots. It’s going to be challenging, obviously, because we’ve got to protect what we have, but at the same time we’re supplementing what we have through a lot of the organic growth efforts, and predominantly through the C&I and business banking aspect.

Great, thank you both for the background and information this morning.

You bet.

Thank you Chris.

Thank you. This is all the questions we have today, so I would now like to hand back to Palmer Proctor for any closing remarks.

Thank you Daisy. Once again, I want to thank everybody for listening into our fourth quarter and full year 2022 earnings call. The momentum and the discipline that we’ve positioned ourselves, I think this year and last year, is going to bode well for us as we move forward, and I’m reminded every day of the importance of teamwork and want to give a big shout-out to the entire Ameris team for all of their hard work and allowing us to deliver this type of performance. I can assure you that that discipline and our ability to stay focused will continue as we move into 2023 and the remainder of the year, so we remain committed to top of class results and I want to thank everybody again for their time and interest in Ameris.

Thank you everyone for joining today’s call. You may now disconnect your lines and have a lovely day.