Ameris Bancorp Q4 FY2023 Earnings Call

Good day, and welcome to the Ameris Bancorp Fourth Quarter Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Ms. Nicole Stokes, Chief Financial Officer. Please go ahead, ma'am.

Thank you, Chuck, 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 Doug Strange, our Managing Director of Credit who will be taking over for Jon when he retires at the end of this quarter. Palmer will begin today with some general opening comments, and then I will begin discussing 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, and good morning everyone. I appreciate you taking the time to join our call today. I'm very pleased with the financial results we reported yesterday, and I'm excited to be able to share some of the highlights in our overall strategic view for 2024 before Nicole gets into some of the financial details. 2023 was certainly a year of discipline and resilience for our company, and the fourth quarter was a solid close to our plan. Throughout the year, we focused on strengthening the balance sheet to prepare ourselves for 2024 with a healthy margin, strong capital, and increased reserves. We grew deposits this year by over 6% and controlled loan growth of 2%, improving our loan-to-deposit ratio to 98%, all while maintaining an above-peer net interest margin of 3.61% for the year. During the fourth quarter, we recorded a $23 million provision for credit losses, bringing our year-to-date provision expense to over $142 million, and that improves our coverage ratio up to 1.52% of loans and 365% of portfolio non-performing assets. And once again, this provisioning was model-driven and not related to any credit deterioration. We built and preserved capital this year such that our TCE ratio is well over our stated goal of 9%, and we also grew tangible book value by over 12% this year. So, as we move into 2024, a lot of the confidence that we have is based on several factors. First, we have and will continue to fight to protect our margin, and we're starting the year from a position of strength there, fortunately. We also have, as you know, a very granular deposit base, a very sticky deposit base. And then when you combine that with a well-capitalized balance sheet and a healthy allowance and, obviously, as we've proven, a culture of expense control, we also have a diversified revenue stream that generates above peer PPNR ROA. And last but not least, what gives us a lot of comfort too is just knowing that we have established individuals in a lot of the top growth markets throughout the Southeast. So, when it's appropriate to accelerate growth, we can do so. So, a lot of those are the main things that give us a positive outlook as we look through the remainder of this year. But with that, I'll turn it over to Nicole now to discuss our financial results in more detail.

Great. Thank you, Palmer. So, for the fourth quarter, we're reporting net income of $65.9 million or $0.96 per diluted share. On an adjusted basis, that's $73.6 million or $1.07 per diluted share. That brings our adjusted return on assets for the quarter to 1.15% and our adjusted return on tangible common equity of 12.81%. For the full year, we're reporting net income of $269.1 million or $3.89 per diluted share. On an adjusted basis, we earned $276.3 million or $4 per diluted share. That brings our full-year adjusted ROA to 1.09% and our full-year adjusted ROTC to 12.55%. Excluding the FDIC special assessment, our PPNR ROA was just over 2%, coming in at 2.01%. We continue to build capital throughout the year. We ended with tangible book value of $33.64, that's a $3.72 increase or 12.4% increase from the $29.92 at the beginning of the year, and the fourth quarter increase was $1.26. Our tangible common equity ratio increased to 9.64% at the end of the quarter compared to 9.11% at the end of last quarter and 8.67% at the end of last year. On the revenue side of things, interest income increased $1.7 million to $332.2 million for the quarter. And for the year, interest income increased $387 million to $1.3 billion. Our net interest income increased $34 million or just over 4% for the year, and that's been one of the most aggressive interest rate cycles we've seen in history. Our margin remains above peer and was stable this quarter at 3.54%, and we're encouraged by that. Beta catch-up was about eight basis points this quarter and was completely absorbed by our positive deposit mix and our asset yield. We were able to pay off about $1 billion of wholesale funding during the quarter, with that being about $700 million of FHLB advances and $324 million of brokered CDs. We continue to be very close to neutral on asset liability sensitivity, which positions us very well for the next Fed decision, whatever and whenever that is. We've updated our interest rate sensitivity information on Slide 11 in the presentation. Our non-interest income for the quarter decreased about $6.9 million, mostly in the mortgage division due to the normal fourth-quarter seasonality. But the good news there from a profitability standpoint is their non-interest expense declined in step with that decline in income, as they do a great job managing their variable costs. And as a company, we once again did a great job this quarter. Our adjusted expenses, primarily excluding the $11.6 million FDIC assessment, decreased $2.1 million, almost all those variable expenses in the mortgage divisions, as I just mentioned. That brought our adjusted efficiency ratio to 52.87% for the quarter and 52.58% for the year. We continue to look for expense reduction opportunities. And although there's always a cyclical first quarter bumps, we still believe we can maintain an efficiency ratio below 55% this year, even with the low single-digit non-interest expense increases this year. On the balance sheet side, we ended the year with total assets of $25.2 billion compared to $25.7 billion last quarter and $25.1 billion last year. Loans increased $68 million this quarter and $414 million for the year. Deposits grew $118 million during the quarter and $1.2 billion for the year. Non-interest-bearing deposits still represent 31% of our total deposits and represent just a minimal decline over last quarter. We do anticipate 2024 loan and deposit growth to increase to mid-single digits, in line with our prior guidance. So I want to close by reiterating how well positioned we are and how focused we are on a successful 2024. So, with that, I'm going to turn the call back over to Chuck for any questions from the group, and we certainly appreciate everyone's time today.

Thank you. We will now start the question-and-answer session. The first question will come from Brady Gailey with KBW. Please proceed.

Hey, thanks. Good morning, guys.

Good morning, Brady.

I wanted to start with the net interest margin. It was great to see that it remained flat compared to the previous quarter, and 3.5% is an impressive level. Some of your peers are honestly at 2.5%. But considering that you're neutral to rates, how do you view the potential changes in the net interest margin as we move into 2024?

Yes, that's a great question, Brady. We were very pleased with the stable margin for the quarter, but our margin guidance remains unchanged. The stability in the fourth quarter was primarily due to the deposit mix. We continue to expect the same single-digit compression that I mentioned last quarter. We were able to extend that for one quarter because of the mix, with public funds coming in and offsetting wholesale funding. We still anticipate some compression for one to two quarters, but we've gained an extra quarter of time. We still believe that maintaining anything above 3.5% during this cycle would be a success. As you can see on Slide 11, we are very close to being asset liability sensitivity neutral. We expect that deposit betas will be higher on the way down, and if the Fed makes cuts later in the year, we would likely be able to reduce rates more quickly, which would certainly benefit us. I hope that helps answer your question.

Yes, that's helpful. And then when I look at your capital base, you have the goal of 9% tangible common equity. You're at 9.6% now, and with your profitability, pretty soon you'll be north of 10%. So, what do you do with that excess capital? I mean, you bought back a little bit of stock in 4Q. Do you increase the dividend? Do you look for other ways to grow the company? What do you do with that excess?

Well, Brady, you mentioned a lot of optionality there, which is exactly what that creates for us. But I think I would tell you during this point in time, just on where we are in this economic cycle, until we get a lot more clarity, I think the most prudent thing for us is to continue to preserve that capital. But to your point, as soon as we feel comfortable or we see some green shoots to be able to accelerate any growth, we will certainly use that accordingly.

Okay. And then finally for me, Ameris screen is a little heavy in commercial real estate and specifically in office. Maybe just an update on how you guys are thinking about the office and the CRE portfolio?

Yes, Brady, I'm not sure what specific information you're looking for. However, we haven't been actively pursuing office loans; there were only a few minor loans made during the quarter. Our exposure in the office sector has been minimal for some time now, and it has been performing well. Less than 2% of our office loans are on our watch list, and those in stronger markets, particularly essential use and Class A properties, are doing quite well. We continuously monitor this situation, considering turnover risk and similar factors. We're keeping a close eye on it. Additionally, you can look at Slide 23 for an overview of the rest of our loan portfolio, which shows that past dues and non-performing assets are negligible. Overall, our non-performing assets in the commercial real estate book were just six basis points, which is very good given the current environment.

Okay, that's great to hear. And Jon, good luck in retirement. Great working with you over the years.

Thank you, Brady.

The next question will come from Casey Whitman with Piper Sandler. Please go ahead.

Hey, good morning.

Good morning, Casey.

Nicole, maybe just how are you thinking about expenses at the bank level here as we think about the growth rate that maybe we should expect in 2024. Can you just walk us through some of the puts and takes there?

Sure. When we consider our adjusted non-interest expenses, excluding the FDIC, I'm estimating an increase of about 3% to 5%. If we remove the mortgage segment due to its cyclical nature, it significantly affects the variability. Looking specifically at salary and benefits, we're likely seeing a 3% to 5% increase and around 2% for everything else, with some variances in IT and risk spending. Overall, this leads to a blended rate of approximately 3%. Currently, the consensus projects around 4.5% growth, and I believe the difference between our estimate of 3% and the 4.5% mainly lies in the mortgage group. Considering potential decreases in mortgage rates, we built in some growth in that area. I think consensus aligns well with my own perspective on expense growth.

Thank you, that's helpful. Palmer, I have a broader question regarding your comments on the loan growth outlook. Mid-single digits is quite good for you. What do you think needs to happen for us to increase that growth rate? It seems like it will largely depend on the overall economy, but what indicators are we looking for?

A significant portion of our pullback was related to commercial real estate. However, our capital has certainly allowed us to improve our ratios in that area. As we see improvements, particularly with the consumer data released this morning aligning well with estimates, there's a sense of optimism in the markets. The demand remains strong. The advantage of our presence is that once we are ready, opportunities will be available without the need to scramble to find them; they already exist. We have intentionally placed limitations on our operations, not due to a lack of demand in our markets, and we consider ourselves fortunate in that regard. At this moment, I believe it is prudent for industry participants to remain selective, which we are committed to. We will continue to prioritize the needs of our existing customers and will certainly consider any new opportunities that arise. However, we will maintain discretion in pursuing new business. Until we observe improvements in commercial real estate and the broader economy, we will maintain our current position.

Makes sense. Thank you.

Thank you.

The next question will come from Christopher Marinac with Janney. Please go ahead.

Hey thanks. Good morning. Palmer, it's been two years since Balboa came on with the company. And I guess I just want to do a look back in terms of how you are adjusting the credit type that you're bringing in from that division? And then also the charge-off outlook either from Jon or Doug for what we should expect this year?

Yes, I'll discuss the strategy and then Jon can provide specifics on charge-offs. This line of business has been quite beneficial for us. It is important to note that it is cyclical and is affected by the economy, particularly small business operators. When these businesses face challenges, we certainly feel the impact. More specifically, as we've mentioned, the trucking industry has been a key focus for us, and we've decided to reduce our exposure there. It's crucial to understand that our appetite for any related credit is currently non-existent. We will need to address this issue as we move forward. While not all of these loans are problematic, some are feeling economic pressures like many small businesses. Overall, we are pleased with this line of business as it offers diversification. As the market improves, we expect this segment to perform well. Although the charge-offs are higher than we would prefer, we have effectively reserved for any potential losses, as evidenced by our results. This segment still constitutes a small portion of our balance sheet, and as we've stated before, it is capped at 10% of the overall balance sheet. Currently, this proportion has remained stable until we see improvements in the economy. That's the overview, and Jon, you can discuss the specifics of the net charge-offs if you choose.

Chris, Palmer provided a great overview, and I completely agree with everything he mentioned. Just to provide some context, the charge-offs in 2022 were only $8 million. Clearly, what he said about trucking is accurate, as we gained a bit of market share in 2022, which we've been managing throughout 2023. We tightened our approach as needed, making adjustments to ensure that we're capturing the credit we desire. Additionally, we're seeing positive trends in past due accounts, which leads us to believe that we might be nearing the end of this situation. I don't expect this year's charge-offs to match last year's levels.

Great. Thank you, both. That's very helpful. And then just a quick one for Nicole. Are you seeing any deposit rate exceptions? Or have those slowed down in the last quarter or so?

We have definitely seen some deposit rate exception slowing, and we have also seen competitive pressure start to slow, specifically where we had seen some very heavy pressure in Florida from credit unions. We have started to see that slow, which is good.

Hey, good morning everybody.

Good morning, David.

I'd like to follow up on that question about deposits. Considering the likelihood of rate cuts, how do you view your ability to adjust deposit rates if the Fed lowers rates this year? Given the liquidity challenges and competitive landscape in the industry, do you anticipate that this process will be more difficult on the way down, with betas responding more slowly than they did on the way up? I'm interested in your thoughts on repricing deposits lower if cuts occur this year.

Yes. So, we think that deposit betas are going to be faster on the way down. And then from a tactical perspective, we've got 95% of our retail CDs that mature in 2024. And then all of our brokered CDs are short and they mature by June. And then we've got very short FHLB and very minimal FHLB advances. So, we definitely have some positive movement on the deposit side, where we feel like we'll be able to reprice those. And then you add in just the interest-bearing money market that they will reprice fairly quickly. So, we feel like we could be aggressive, and then the 31% non-interest-bearing will certainly help that as well.

That's helpful. I'm interested in your thoughts on the current mortgage situation and any trends you're observing. With mortgage rates starting to decline and the possibility of further reductions, how do you view mortgage volumes for the upcoming year? Also, do you have any expectations for improvement in the gain on sale margin?

Yes, I think with the Fed cuts or potential Fed cuts, obviously, we'll see improvement in that margin. But I would tell you, as we mentioned last time, so many times in environments like this, we all have a tendency to look at headwinds and not focus on tailwinds. But this would certainly be a big tailwind for our operation just because of how well we're positioned. And what we've done and what we've been able to do in terms of garnering efficiencies and keeping the costs in line with the revenue decline, that same is true on the flip side. So, when the opportunity is there and the refis and the purchase activity picks back up, we are extremely well-positioned there. So, I would tell you that as we look out and if we end up getting as many rate cuts as everyone thinks we are, that could be a tremendous lift for our organization, just knowing how we performed in the past and how we can perform in the future. And more importantly, how we're already positioned in terms of our bankers and also our operations. So, that could be a real bright spot. But a lot of that, as we touched on, is going to be predicated by what the Fed does, because that's the big driver, as you know, of that consumer behavior.

Yes, that makes a lot of sense. I have one more question. I'm interested in your approach to managing deposits. You've done a great job in this area, and we've discussed the speed of cutting betas or the potential decrease of betas. I'm curious about your outlook on deposit growth going forward. It seems like there has been more seasonality recently among some banks regarding deposits. How do you see your ability to drive core deposit growth in the coming year, and what initiatives have you implemented to support that?

Yes, I would say that we are quite optimistic about our prospects. If you consider the momentum we've built even during this challenging year, we managed to grow our deposits despite the difficult environment over the past 12 months. Importantly, we have retained deposits and maintained a strong deposit mix, excluding the pandemic-related deposits. Much of this success stems from our focus on organic growth and cultivating long-term relationships rather than just transactions, which has proven beneficial for us and remains our priority. Throughout the year, we emphasized that we did not need to hire additional bankers to increase volume, and fortunately, we didn't, as volume was purposefully reduced. Instead, we invested in our treasury platform, which had a remarkable year largely due to our initiatives in Commercial and Industrial (C&I) lending and the hard work of our treasury team. This momentum significantly contributed to our performance in the fourth quarter, and I believe it will continue throughout the year. We have several initiatives underway that are already producing results and will keep delivering moving forward, so I feel more optimistic than others about our ability to sustain core funding growth.

I mean, so would you expect core funding to maybe outpace loan growth? Or would you expect maybe that remixing of the balance sheet to kind of keep deposits stable and just, again, improve the mix? Curious kind of how you think about growth prospects and overall balance sheet growth?

Yes, ideally all loans would be funded with core funding, but we know that's not realistic. There is a balance between our desire for loan growth and our current situation. Right now, I would say that our desire for loan growth is limited, as mentioned earlier. Therefore, you will likely observe a higher percentage of core funding in relation to loan growth. However, once we begin to accelerate loan growth or determine that it is appropriate to do so, you may see increased use of wholesale funding or other funding sources in addition to core funding.

Okay, terrific. Thanks everybody.

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Palmer Proctor for any closing remarks. Please go ahead, sir.

Yes. I'd just like to thank everyone once again for listening to our fourth quarter and full year 2023 earnings results. And I'd also like to give a special thank you and recognition to Jon Edwards, our Chief Credit Officer. This will be his last earnings call. But I'd like to thank him for his friendship and service to Ameris for over 25 years. We are certainly going to miss him, but he assures me that he's just a phone call away if we ever need him. But I want to thank everybody once again for their time and their interest in Ameris Bank. Have a great day.

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