Ameris Bancorp Q1 FY2023 Earnings Call

Hello, everyone, and welcome to the Ameris Bancorp First Quarter Earnings Conference Call. My name is Bruno, and I will be your operator today. I will now hand over to your host, Nicole Stokes, Chief Financial Officer. Nicole, please go ahead.

Thank you, Bruno, 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; Jon Edwards, our Chief Credit Officer; and Mike Spingler, our Treasurer. Palmer will begin with some opening general comments, and then I will discuss the details of our financial results before we open up for Q&A. 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. Good morning, everyone. I appreciate you taking the time to join our call today. On our last earnings call, I reminded everyone how our discipline has really positioned us well for 2023. I also mentioned the importance of teamwork and our ability to stay focused on core fundamentals, and that message couldn't have been more timely just five weeks later, as we faced the banking disruption, where the value of the balance sheet and stable deposit ages have really proven the importance of core banking relationships here at Ameris. We actually saw deposits grow from March 10 through the end of the quarter. For the first quarter, we reported net income of $60.4 million or $0.87 per diluted share. Included in this is a $50 million provision for credit losses, which we were proud to have the ability to use strong underlying earnings to build the reserve because of our economic forecast, which specifically reflects declines in the CRE and home price indices over the next few quarters, which are primary loss drivers for our CECL model. But I think it's important to note that this provision was driven by our forecast model and not related to any credit deterioration in our loan portfolio. In fact, our credit metrics actually improved this quarter, which was evidenced by a stable NPA ratio and lower watchlist loans. After the provision this quarter, our reserve for credit losses, excluding unfunded commitments, represented a healthy 121% coverage ratio and 285% of net NPAs. Our pretax pre-provision ROA was 2.07% for the quarter, once again above our target of 2% and an improvement from the 2.01% PPNR ROA in the first quarter of last year. Nicole is going to talk to you in a minute about the margin details, but I did want to mention that we are still remaining above here at 3.76%, and our discipline around expenses allowed us to operate at a top peer-adjusted efficiency ratio of less than 52%. Our capital position remains strong. We grew tangible book value again this quarter by over 11% annualized to end at $30.79 per share. We're constantly reminding ourselves of the importance of discipline and the ability to remain focused on things we can control. And because of this, we feel prepared for the future, with some of the main drivers being when you take a look at our franchise value, the diversification we have among business lines and geography, with 70% of our net income coming from the core bank, and also the solid core deposit base that we have with a low level of uninsured, uncollateralized funding, which is at 29.5%. And then we've clearly got a prudent culture of expense control and solid capital and liquidity positions. And most importantly, when you look at where we're positioned with our bankers in the top southeastern markets, that in and of itself allows us to have a lot of confidence as we move through the remainder of this year and into next year. I'll stop there now and turn it over to Nicole to discuss our financial results in more detail.

Great. Thank you, Palmer. As you mentioned, for the first quarter, we're reporting net income of $60.4 million or $0.87 per diluted share. On an adjusted basis, when you exclude our gain on BOLI proceeds this quarter, we earned $59.9 million or $0.86 per diluted share. Our adjusted ROA in the first quarter was 97 basis points, and our adjusted return on tangible common equity was 11.41%. And remember, these are both after the $49.7 million provision expense. So as Palmer mentioned, on a PPNR basis, we were above 2% at 2.07% PPNR ROA. Our tangible common equity ratio was 8.55% at the end of the quarter. However, we had about $900 million of excess cash on our balance sheet at the end of the quarter, and that negatively impacted our TCE by about 30 basis points. So without that excess cash, it would have been $885 million. We've already used that excess cash to pay off about $950 million of FHLB advances during the first few weeks of April, and those were at an average rate of $485 million. Our net interest income for the quarter increased $22 million over last quarter, at $112 million from the first quarter of last year. In comparison, our interest expense increased $34.5 million this quarter compared to last quarter and then $73 million when you compare it to the first quarter of last year. So our net interest margin remained strong at 3.76%. Our yield on earning assets increased by 34 basis points, while our total funding cost increased 65 basis points. So our margin declined 27 basis points, and there were really three contributing factors there. First, we had about 18 basis points of the compression due to the negative deposit mix that was non-interest-bearing in transitioning to interest-bearing. We had 14 basis points of beta catch-up, which is typical when you near the end of the cycle. And then those two negatives were offset by 5 basis points of expansion because of higher loan yields and average balances. Due to the competitive pressures and the banking turmoil event in March, we've been more aggressive with raising deposit rates this quarter. However, looking at our cumulative deposit beta, it has still been 23%, which is exactly in line with how we modeled it when we started the cycle at 23%. We continue to be slightly asset-sensitive with NII increasing less than 2% in a 100 basis point environment, as we've been programmatically repositioning our balance sheet closer to neutral. And remember, we started this cycle with about 7% asset sensitivity. So we've definitely worked to get closer to neutral there. We've updated the interest rate sensitivity information on Slide 10. Total noninterest expense increased $4.5 million in the first quarter, all of which was due to cyclical payroll taxes and 401(k) matching contributions. Our team did a great job watching expenses, resulting in an adjusted efficiency ratio of 51.99%. We continue to look for expense reduction opportunities, and we still believe we can maintain an efficiency ratio below 55% this year and into 2024. On the balance sheet side, we ended the quarter with total assets of $26.1 billion compared to $25.1 billion at the end of the year. That $1 billion of growth was really due to cash on liquidity of $900 million that we already spoke about. And then, loan growth of about $142.6 million represents an annualized loan growth ratio of 2.9% for the quarter. And we are slowing our loan growth expectations to low to mid-single-digit growth, and we plan to use deposit growth as our governor on loan growth. Our deposits grew $434.7 million or about 8.9% annualized, ending at $19.9 billion compared to $19.5 billion at the end of last year. Excluding the $1.1 billion growth in brokered CDs, deposits were reduced by about $675 million. While there are a lot of ebbs and flows within that, we had about $400 million of that with expected and usual cyclical municipal and agricultural outflows that we always have in the first quarter. The remaining was really about $200 million of deposits that were just normal business, or the businesses were sold, or something happened to the business. So we've really only had about $70 million of declines of deposits going out, where they were going to higher rates, mostly investment type of brokerage accounts. The majority of the decline in non-interest-bearing this quarter was an internal movement from non-interest-bearing to interest-bearing, and some of the banking turmoil really sparked customers to look at their rate. We saw very little movement of non-interest-bearing deposits actually leaving the bank. Our total non-interest-bearing deposits still represent about 36% of our total deposits. Our deposit base is well diversified, and no single depositor represents over 1% of deposits. And our uninsured uncollateralized accounts remain stable, and they actually improved this quarter to just under 30%, at 29.5% of total deposits. So with that, I'll wrap it up and turn the call back over to Bruno for any questions from the group.

We have our first question from Casey Whitman from Piper Sandler.

Maybe we could start out with just the margin. Can you walk us through sort of the margin maybe by month or at least, where the margins sort of ended the quarter either in March or at the very end, if you have it? And just, so we can sort of get a sense of where we're starting for second quarter?

Sure. So for the month of March, we were in the mid-360s, about 3.63%. So if I'm guiding margin, I want to make sure everybody realizes that the biggest contributor to margin at this point is the mix of deposits. And so, that's kind of the wild card in this. But assuming that we can maintain our mix, and it has slowed, and so the shift from non-interest-bearing to interest-bearing has slowed. Assuming that we can keep that mix, and assuming that the margin stays flat from March, we would be looking at about a 15 to 20 basis point compression in the second quarter, assuming deposits remain at the same mix that we have today.

Okay. And is the assumption that you could sort of hold that in the back half of the year? Or do you think we should maybe even assume more compression from there?

I think that's an excellent point. We've been discussing that as the Fed maintains its position, the margin will continue to tighten due to ongoing pressure on deposit pricing. Everyone is competing for the same deposits right now. Thus, much of it relies on the Fed's actions. If they continue holding their stance, we could see additional compression heading into the third and fourth quarters.

Understood. Can you remind us of your threshold for how large you would allow the equipment finance loan book to grow and how that relates to the updated loan growth guidance you just provided? How much growth do you expect from that group?

Yes. What we've said from the very beginning is we've never exceeded more than 10% of our balance sheet. But the other thing, too, that Nicole touched on in her comments is that one of all the things across the board that we're looking at is we're not going to allow loan growth to outpace deposit growth. So that will be our governor going forward. So even though there's additional capacity there to go up to 10%, that doesn't necessarily mean we would get to 10% if we don't have the deposit strength to support it.

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

Nicole and Palmer, I just want to add on to the question that Casey asked. If longer-term and intermediate rates back off, which they have been lately, does that help at all? Or is it much more tied back to the Fed funds rate given what you were just saying a second ago?

No, it really is the Fed funds rate, it is the latter of those two options.

Got it. Okay. And then back to the Equipment Finance area, what would be a good loss rate from that area? And I presume that that's driving a little bit of the charge-off change we saw this quarter?

The charge-offs this quarter were primarily influenced by specific factors. The loss rates we examined during our due diligence were relatively high, peaking in the threes. This quarter's losses are somewhat reflective of certain collateral, particularly some light-duty trucks that are facing challenges in the marketplace. However, we did anticipate an increase in our loss rate based on our due diligence, so we were expecting some rise in charge-offs as it aligned with our model. It’s important to note that the division continues to perform well, contributing positively to pre-tax, pre-provision results, and the overall net spread remains favorable for the bank.

Great. Yes, that was going to be my other question. Are you satisfied with the spreads? And in general, is the new loan yield rising in line with the overall portfolio, or is it increasing faster than the overall Ameris loan portfolio?

It fluctuates based on the quality we provide, but it has consistently remained in double digits throughout the first quarter. It is not necessarily outpacing the rest of Ameris, but it is certainly keeping up with the market.

Great. And then just last question. This has to do with the build in the allowance. From here, do you feel there's flexibility on provision just given that you've grown the reserves a lot this past quarter?

Sure. I'll take that one. When examining the model, we utilized the CRE pricing index and the home pricing index. This quarter, we experienced a downturn in the good CRE pricing forecast, as we incorporated a rolling quarter that was not favorable. It relates to the same anomaly, and I believe you’re inquiring whether this anomaly will occur next quarter. Currently, we do not expect it to be as severe. Of course, Moody's forecast will update before then, but assuming the CRE pricing index does not decline further, I would anticipate that the reserve build is largely complete.

One more question on the reserve build. Was there anything in Ameris' results that drove the reserve growth? I mean, when I look at your asset quality, it looked fine in the quarter. So is there anything that you're seeing that makes you more cautious to build the reserve here?

No, there's not. What we're seeing is pretty reflective of what you see in the results in our credit. And this was, I think, a prudent move on our part, driven by model and nothing more than that. That answers your question.

Yes. And then, with deposits being the governor on loan growth, I mean, you guided to low to mid-single-digit loan growth. Should we expect that same level of growth on the deposit side as well going forward, low to mid-single digits?

Yes, kind of that 3% to 5%. Obviously, we would love to grow deposits more than that, specifically non-interest-bearing, but I think at this point, our internal goals and projections are that 3% to 5%.

All right. And then last for me, just on mortgage. That revenue bounced back a little bit in the quarter. I know the gain on sale margin recovered, although it's still pretty low. Any thoughts on your forecast for mortgage for the rest of the year?

Yes. I would tell you right now, we're pretty bullish on what we're seeing for this quarter, and this is the spring season, which traditionally, there is seasonality to this business. We said last quarter is kind of reverting back to that outside of any economic issues that may come up. But right now, pipelines are pretty solid. The margins are improving. And that's the other thing that's really the highlight of this company, too, is when you look at compression on margin, our ability to generate non-interest income through areas like premium finance and mortgage just shows you the actual benefit of diversification. So a lot of it is mortgage fees that we generated this quarter allowing us to offset a lot of that decline that we saw. So I think, mortgage will continue at least for the immediate future to be pretty consistent with what you saw this quarter.

Maybe just following up on the growth side again. First of all, I'm just curious where new loan yields are, if we exclude Balboa. And then, maybe where do you expect growth to be driven by? Where are you seeing good risk-adjusted returns at this point?

Well, I would tell you, equipment finance is a different obviously a different area as you touched on. But in terms of the growth opportunities, we're still seeing some meaningful opportunities in our commercial book and the C&I book. The upside for all banks from what we're hearing and seeing and now from the competition is that we're able to be a little more selective in terms of pricing and expectations with equity and deposits. And so most of the coming on rates that we're seeing in the commercial book are 7% plus, which is very encouraging to see, especially if there are deposits associated with that meaningful deposits. So that's really where we see additional opportunities. And one of the things that we are actually spoiled with is being in the Southeastern growth markets because when you look at Florida and Georgia and the Carolinas, there's still activity out there. People are being more cautious, but that's really where we see more of the opportunity as we go forward.

And then David, the coming on rates in the first quarter, excluding Balboa in the lines of business, had total production at about 8.72%. This was divided into a fixed rate of 9.40% and a variable rate of 7.68%.

That's helpful. And that 8.72%, that's including Balboa or that's excluding Balboa?

That's excluding the Equipment Finance.

Okay. There's a strong emphasis on commercial real estate right now, and I'd like to know what you're observing in that portfolio. I appreciate the insights you've provided in the slide deck. You've implemented stringent underwriting standards and maintained low loan-to-value ratios. However, I'm curious if there are any specific segments you're avoiding or monitoring closely. Are you tightening your standards in this area? Conversely, as many other banks have pulled back, does this present an opportunity for you to enhance your pricing power and explore new opportunities?

Well, from the perspective of opportunities, as Nicole mentioned, our opportunities will be governed by the ability for loan growth or deposit growth. So the short answer is yes, we are seeing opportunities. Some of that pullback or tightening you mentioned is not requiring us necessarily to change any underwriting parameters. It's somewhat of a natural tightening just because in the rate environment we're in, things that may have been acceptable at a lower rate, you've got to rightsize that again at a higher going-in rate. So some of that is kind of self-tightening just because of the underwriting that's being done in the rate environment. But I don't think you see us necessarily shying away from anything that's not sort of already in the marketplace. Our office portfolio is, I think, in good shape, but it's not necessarily something we're out looking for new business on. And right now, we put out a call for our folks to do more owner-occupied, and they responded and you saw that in our slides also. So we've got several lines that help us to not have to rely on CRE projects in this kind of winter of CRE. So that will help us to continue with overall loan growth, but not having to see it necessarily come from CRE loans.

Okay. That's helpful. And then maybe just touching on the non-interest-bearing deposit front. I appreciate the commentary on it really being a migration line here. We're not seeing any customer attrition or anything. But I'm just curious, have you seen NIB balances start to stabilize here, early in the second quarter? Obviously, it's a bit of a seasonally weak quarter with taxes and those kinds of things. But are you still seeing that migration or clients maybe utilizing cash to pay down higher-cost floating rate debt? And then, do you think that NIB composition can kind of hold here in that mid-30% realm?

I think the pressure is still there. And we're doing everything we can to retain those deposits. Has it slowed? Absolutely, but is the pressure still there, yes. And are we having the conversations with customers? Yes. David, I need to correct something that I said when I gave you those rates; that did include the Equipment Finance. So I need to give you the bank-only rate, I apologize for that. Fixed was 6.35%, variable with 7.68%, and all in with 7.17%. I looked at the wrong chart, I apologize.

There are many individuals with extra cash reserves who are choosing to use their own funds instead of borrowing at rates exceeding 7%. Consequently, I believe the pressure we will encounter moving forward as an industry has already begun, as many are seeking higher yields on their surplus cash. Additionally, much of that excess cash will likely be utilized rather than paying higher interest on loans. This presents a new challenge, particularly in the commercial sector.

Our next question comes from Russell Gunther from Stephens.

On the non-interest expense side, really good results this quarter. You guys talked about pretty intense focus there. So could you share some thoughts around run rate expectations going forward?

Sure. We anticipate some minor increases, primarily in the salaries and benefits area. However, we maintain strict control over our expenses. We are reviewing every line item, including leases and travel, as well as other categories. We are evaluating projects to distinguish between what is essential and what can be postponed for three to six months. This process is ongoing. When I mention slight increases, I am excluding mortgage-related expenses since we expect mortgage production to rise in the second and third quarters due to its typical seasonality. This will lead to higher commissions and some variable costs, but aside from mortgage, we expect overall expenses to increase by around 3%.

Okay. That's really helpful in the core. And then, just last one for me. You guys have really solid capital levels on a TCE basis as well. Just thoughts on the buyback here. And getting more active.

Yes, it's awfully tempting at this kind of currency price, where we are today. And that's certainly an arrow we have in our quiver, and it's certainly something that we'll give consideration to in this next quarter.

We currently have no further questions. So, I would like to hand back to Mr. Palmer for closing remarks. Please go ahead.

Great. Thank you, Bruno. I'd like to thank you, everybody again for listening to our first quarter 2023 earnings results call. Our discipline in creating diversification in both the loan and deposit franchise, as well as our revenue streams, has positioned us well for the future. Our well-capitalized balance sheet remains strong with a healthy reserve for credit losses, stable core deposits, and a well-designed liquidity plan. And all of this really allows us to produce stable top-of-class financial results. Thank you again for your time and interest in Ameris Bank.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.