Ameris Bancorp (ABCB) 2022 Q4 法說會逐字稿

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'll be coordinating your call today. (Operator Instructions)

I'll now hand over to your host, Nicole Stokes, Chief Financial Officer, to begin. Mrs. 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 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. Good morning, everyone. I appreciate you taking the time to join our call today. We are 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 6 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 in the mortgage industry refi boom and the PPP income from 2020 and 2021. As a company, our pretax 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 to capital, our capital position remains strong. Our TCE 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 $1 billion 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.

And our full year '22 organic loan growth was $3.5 billion or 22%. We continue to anticipate 2023 loan growth to moderate and 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 noninterest-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 for broker 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 only 8 basis points of total loans for the quarter and the year. Our nonperforming 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.

So 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 margins throughout the next few Fed hikes. We also have a strong core deposit base, as you know, the deposit betas that are better than modeled.

We're going to continue to target a pretax pre-provision ROA greater than 2% and 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%. And 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. And 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.

So I'll stop there and turn it over to Nicole and let her discuss the financial results in more detail.

Great. Thank you, Palmer. As you mentioned, for the fourth quarter, we're reporting net income of $82.2 million or $1.18 per diluted share. On an adjusted basis, when you exclude the MSR gain, we earned $81.1 million or $1.17 per diluted share. Our adjusted return on assets in the fourth quarter was 1.32% and our adjusted return on tangible common equity was 15.78%.

For the full year '22, we're reporting net income of $346.5 million or $4.99 per diluted share. On an adjusted basis, we earned $329.4 million or $4.75 per diluted share. That brings our full year ROA to 1.39% and our ROTC to 16.92% for the year. We ended the quarter with tangible book value of $29.92 per share. That's an increase of $1.30 this quarter. And for the year-to-date period, we grew tangible book value by $3.66 or almost 14%, as Palmer mentioned, we started at $26.26 at the beginning of the year, and we've ended at $29.92 at the end of the year.

Moving on to net interest income and margin. Our interest income for the quarter increased $39 million compared to the third quarter and increased $95 million when you compare the fourth quarter of last year. In comparison, our interest expense only increased $28 million this quarter compared to last quarter and just $38 million when compared to fourth quarter of last year.

So for the full year '22, our interest income increased $191 million while our interest expense only increased $45 million. So we had a net increase in net interest income of about $146 million or just over 22% year-over-year.

But what's really important there is that we have to remember that, that included the headwind of the PPP runoff. So when you look at the core bank segment, net interest income in the core bank increased $188.7 million or 41.2% for this year. That was attributable to both asset growth and to our margin expansion. So on the margin expansion, we increased 6 basis points this quarter from 3.97% last quarter to 4.03% this quarter.

Our yield on earning assets increased by 54 basis points while our total cost of deposits only increased 39 basis points. Due to competitive pressure, we have been more aggressive with raising deposit rates this quarter, but we're still below our model betas. Our cumulate deposit beta this year has been about 15% compared to an original model data of 23%. We continue to be asset sensitive with NII increasing about 2% in an up 100 environment and we've updated the interest rate sensitivity information on Slide 10. Noninterest income for the quarter decreased about $17 million and $14.6 million of that was in the mortgage division. Once again, our mortgage group did a great job reducing their expenses and production pullback. Expenses in the mortgage division declined by $7.3 million and represents 50% of the revenue decline due to the variable expenses there.

Purchase business stabilized this year, closer to historic levels at 82% of total activity, and we really are prepared for the continued success at our kind of pre-pandemic pre-refi boom levels. Total noninterest expense decreased $4.5 million in the fourth quarter. We really do remain focused on our operating efficiency. Our adjusted efficiency ratio improved to 49.92% this quarter from 50.6% last quarter.

And for the full year, our efficiency ratio was 52.54% compared to 55% last year. We continue to look for expense reduction opportunities. And although there's always a cyclical first quarter bump, we still believe we can maintain an efficiency ratio in the low 50s next year, even up even with some slight noninterest expense increases.

On the balance sheet side, 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 organic loan growth of $576.1 million or 12.25% annualized for the quarter. And for the year, that was $3.5 billion or 22% for the full year.

We do anticipate 2023 loan growth to slow and be in the mid-single digits for next year to get to this year 2023. Total deposits were relatively flat at $19.5 billion for the quarter, and our noninterest-bearing deposits still represent over 40% of our deposits, 40.74% to be exact. And then our total non-rate-sensitive deposits include noninterest-bearing now in savings, they represent over 65% of our total deposits. And as Palmer mentioned earlier, we've got minimal less than 1% of our deposits are brokered.

So with that, I will wrap it up and turn the call back over to Daisy for any questions from the group.

(Operator Instructions) Our first question today comes from Casey Whitman from Piper Sandler.

So maybe first starting, Nicole, you mentioned, I think, a 15% cumulative deposit beta versus your 23% model. Is it your expectation that 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? And maybe just touch on like sort of where deposit costs were at the end of the quarter versus where they were over the quarter, if that's gone up meaningfully or not?

Sure. So yes. So our original modeled beta was about 23%, and our current modeled beta is about 21%. And so we were below that when you look at -- and again, that is modeled all in. So that's including interest-bearing and noninterest-bearing. And so for the cycle we're at about 15% compared to that original 23% and our current modeled beta is about 20% to 21%.

We are asset sensitive still, slightly asset sensitive about 2%. But what I would say is with every rate hike, we have seen -- definitely seen competitive pressure in the market. And so we would guide the margin to be peaking or near peak at this point. And that even though we are asset sensitive that if we -- the Fed moves next week and maybe they have 1 or 2 more moves that we really have that extra beta that catch-up beta to be able to protect our deposits. So we would guide that the margin is stabilizing or peaking now. And then for spot deposit costs at the end of the quarter might need to get back with you on that one, Casey.

I will say that the biggest move there is going to be in CD and that our overall CD customer. I think our many markets and all of those are really consistent with what we reported for the quarter, but our CD costs to the stock costs. So our money market stock costs are about -- at the end of the year were about 2%. Now its about (inaudible) for a total of about [153].

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

Sure. So we going into this when we purchased the loan portfolio, which we like that credit, and we like that cash to undervalue, and we like the rate. And so when we model that, we modeled that with some wholesale funding, at least temporarily. So the fact that when you look at our FHLB borrowings by one side at the end of the year, 1/3 of that was really to fund that portfolio purchase, which is accretive to ROA, so really, the remaining borrowings is about $1 billion of that FHLB borrowing.

And we really look at that from a profitability, a margin and an ROA perspective. But had we instead of done brokered -- I'm sorry, instead of doing FHLB advances, if we had just done brokered, which we have room to do that because our brokered were less than 1%. So if we had booked those as brokered deposits instead of FHLB advances, our loan-to-deposit ratio would have been less than 95%, because we would have grown that denominator.

So we really were looking at that profitability and our timing of that and the longevity that we wanted to lock in and the rates. And so we made that decision from a profitability standpoint.

Okay. And just with the loan purchase, obviously, you must be starting about the credit. Just what kind of yields are on that book? And is the plan to add more to that? Or is this sort of a onetime transaction?

So this is the acquired piece of the onetime transaction, but we already have -- that's already a product that we offer is cash under value secured. We like the credit. It's a variable rate product. Right now it's yielding over 6% with very low credit risk. So we like all of that. And it complements the existing portfolio that we already had. We purchased it and converted it to our core system. So there's little to no very minimal overhead to really continue that product. So it really was accretive to ROA.

Our next question today comes from Brady Gailey from KBW.

I wanted to start with mortgage. 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. 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 is 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 than we are accustomed to. So first quarter of each year is always typically the weaker quarter. And then second quarter generally picks up due to the spring selling season. And then third quarter, which is typically our highest quarter and then fourth quarter, assuming that rates kind of moderate, we'll continue to see some improvement there.

We think that the Fed will have long-term rates moderating probably around 2.6%, 2.85% and the 10-year, bringing kind of long-term rates to a steady 5% for Fannie and Freddie type products into 2024. So 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 is just some more moderation in getting back into that pattern of seasonality.

And in terms of the gain on sale, Nicole, do you want to talk about that?

Sure. So our gain on sale this quarter was a 1.26% and we certainly don't feel like that -- we feel like that's definitely going up and that, that should stabilize. We've said -- we have originally said that 2.75% to 3%, don't know when we'll get there. But I do have some interesting just little detail I wanted to mention on mortgage when there's been so much noise between 2019, '20 and '21. And so when you look -- kind of go back and look at fourth quarter '19, which is post-Fidelity, but it's also a fourth quarter.

It's a really good comparison quarter and that it's post-Fidelity, it's pre-COVID, pre-boom and it's a fourth quarter. So you've got the cyclicality in that fourth quarter. And when you look at that, our production is down about 40% this quarter over -- I'm sorry, 30% this quarter over fourth quarter '19 but our profitability is greatly improved. And a lot of that has to do with all of the things that the mortgage group learned and did because they had to during that refi boom. So they definitely become more efficient. And then when you look at their contribution to the company in '19, they were about 19% of our net income.

And this quarter, they were about 13% of our net income. So they continue to be efficient and they continue to monitor all of that. And so if they can stay on that projection, and be able to kind of make up for that loss of gain on sale, when gain on sale comes back, it's just going to be kind of gravy for us.

So when we think about production for next year, I would model about maybe $4.5 billion to $5 billion of production. That's probably $1 billion in the first quarter and fourth quarter and then about $1.5 billion in the second and third. So that gets you to about -- between $4.5 billion and $5 billion of production. I would hate to tell you to model a 1.26% gain. I would hope that it would come back a little bit and that we would see that come back this year. But I really don't see it coming back into that 2.75%, 3% range until the market really stabilizes. I think it would be safe to project kind of in that 2% for next year.

Okay. All right. That's helpful. And then there's a lot of focus on commercial real estate and specifically in office. I know you guys gave 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 crew?

Yes, I can give you a little bit. So our office portfolio is primarily kind of mentioned it on the slide, but really 3 kind of categories, I guess, you'd call them essentially use meaning that a company needs that facility for a call center or headquarter building or something along those lines, medical office and/or credit tenant. So we really don't have kind of CBD offices and really not a lot of just sort of the generic 2- or 3-story kind of stuff.

So we really try to focus on those 3 categories for that portfolio. As you can see on that slide, there is a level of NPAs. It's 70 basis points. But I would tell you that, that is really in one loan that we are continuing. It kind of broke in the second quarter of 2022, and we're continuing to work out strategy on that, but there's not been anything sort of widespread as far as any cracks that have developed thus far in that portfolio.

Okay. All right. That's helpful. And then finally for me, cash levels continue to come back down. If I look at cash to average earning assets, I think it's about 5% today, that was 18% last year at this time. But just talk about where do you want to keep cash longer term? Like what's the floor? And then what implications does that have for the bond book? Should we think about -- would you guys still growing loans and deposits potentially being flat here. Should we think about the bond book starting to shrink in 2023?

A great question, Brady. So our investment portfolio as a percentage of assets now that our earning assets is about 7% -- 6.5% to 7%. And kind of that you would normally run kind of in that 9% to 10% range. And so we had been programmatically kind of buying bonds in the fourth quarter.

We kind of bought about $100 million a month. And so we've been growing that bond portfolio. And kind of that ties into your cash question that we really kind of -- we take our bond portfolio and our cash because remember, we don't have all of the unrealized loss in the bond portfolio that some of our peers have. And so our bond portfolio is sellable with very little impact to regulatory capital because of our AOCI position.

And so we can still -- we are able to consider our securities and our cash in our liquidity ratio. So we keep that liquidity ratio in that 10% to 12% to ask where was our kind of minimum there is kind of that 10% to 12% between those 2. So that's where we are. I would expect to see cash kind of staying at that 5%. And then depending upon what the market does with the bond portfolio, I think it would stay kind of in that 7%, possibly growing to 9%, but there's so much uncertainty in the market today.

One thing I wanted to add there as I think it might be a lead in to yours is kind of our loan-to-deposit ratio at [1.02%] and that people see that may be elevated. But I wanted to point out that if you take loans plus investments because our investment portfolio, we don't have the AOCI dilution, and it is a liquid asset for us.

We -- if you take loans plus investments to deposit, we are right in line with peer where some of our peers have bond portfolios that are very low yielding. They can't sell them because of AOCI impact becomes realized and affects the regulatory capital. So we have used some of our loans and some of our loan purposes to kind of offset the bond portfolio. So we really view that together.

And then on the liquidity funding side, our brokered CDs, I think we already said it probably twice. But we really have minimal brokered money. It's less than 1%, and our FHLB borrowings are at less than 6%. So we have room on the liquidity side. And like I said earlier, we had not done the FHLB advances that we had on the broker deposit route instead that loan-to-deposit ratio would be less than 95%, and it wouldn't be that quite the outlier. But again, we manage that funding source from a profitability and ROA perspective and margin perspective.

(Operator Instructions) Our next question is from Christopher Marinac from Janney Montgomery Scott.

Nicole, just to kind of continue on the same points you were making. What is the cash flow from the bond portfolio? And how much of your funding -- or can you do it internally just from that alone?

So, give me 1 second. Sorry for the dead silence for a second. I'm giving you. Chris, I apologize, I thought I had it right here at my fingertips, and I don't want to give you the wrong number here. So I'll get back with you on that. But I would say at this point that anything that cash flow is off the bond portfolio, I would consider reinvesting that into the bond portfolio to kind of still keep it at that 7% And because we have moved our bond portfolio down to less than 3% of assets and we've really added that bond portfolio back in over the last 6 to 8 months, the cash flows on that is not as aggressive as you might expect.

Okay. Not a problem. That's helpful. And then outside of the purchase...

Sorry, I make the duration of bond portfolio is about 3 years.

Good. Okay. Perfect. And 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 that you had a very successful last year from Balboa and all the other organic sources. So I just wanted to kind of understand if that pace is similar or slowdown.

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, SBA, I mean we really have it diversified across all of the verticals there.

And Chris, one benefit from this cycle, if you want to look at it glass half full is that it's allowed banks to kind of step back, obviously, be more selective and we have all intentionally pulled back on CRE. But -- when you look and you've got -- you're limiting how much power you want to put to use in certain asset classes, what it allows us and all banks do is kind of have a focus on what they're going after. So our continued focus on obviously deposits, but more importantly, on C&I kind of growth, too is that we're getting a lot of really good opportunities on the C&I front. So I think you'll continue to see strong growth there on core organic kind of C&I in addition to the equipment finance type of activities.

So we're really encouraged by that. And the other reason and benefit in doing that, as you well know, is from the deposit front. So the deposit side of it, we're really excited about because a lot of these operating companies are bringing material deposits over to the bank, which includes all of our treasury management services. So that's really been a bright spot. That's the focus. We've kind of got 3 pillars for 2023 that we're focused on with the first one being deposits, deposits, deposits.

And fortunately for our company, that's nothing new. But all our incentive plans have been adjusted to reflect that across the board in a more intense level they've always had a deposit component, which is really the result of that 41% core funding that we have on DDA. But -- and then the second thing is the C&I small business growth. And then third is focused on more of the customer experience. So those are really our 3 main focuses for next year. And I think that's going to serve us well as we kind of navigate through the remainder of 2023.

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

Yes. That's probably going to be one of the bright off. 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.

Thank you. This is all the questions we have today. So I'd now like to hand back to Palmer Proctor for any closing remarks.

Thank you, Daisy. And once again, I want to thank everybody for listening in to 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 we want to give a big shout out to the entire Ameris team for all of their hard work allowing us to deliver this type of performance.

And I can assure you that, that discipline and our ability to stay focused. We'll 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.