Ameris Bancorp (NASDAQ:ABCB) Q4 2022 Earnings Conference Call January 28, 2023 9:00 AM ET
Company Participants
Palmer Proctor – Chief Executive Officer
Nicole Stokes – Chief Financial Officer
Jon Edwards – Chief Credit Officer
Conference Call Participants
Casey Whitman – Piper Sandler
Brady Gailey – KBW
Christopher Marinac – Janney Montgomery Scott
Operator
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.
Nicole Stokes
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.
Palmer Proctor
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.
Nicole Stokes
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, and that brings our full year ROA to 1.39 and our ROTCE 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 ended at $29.92 at the end of the year.
Moving onto net interest income and margin, our interest income for the quarter increased $39 million compared to 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. 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.
What’s really important there is we have to remember that that included the headwind of the PPP run-off, so when you look at the core bank segment, net interest income in the core bank increased $188.7 million or 41.2% this year. That was attributable to both asset growth and to our margin expansion. 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 modeled betas. Our cumulative deposit beta this year has been about 15% compared to an original model beta 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.
Non-interest 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 as production pulled back. Expenses in the mortgage division declined by $7.3 million and represent 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 [indiscernible] pre-pandemic, pre-refi boom levels.
Total non-interest 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 50.06% 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 is always a cyclical first quarter bump, we still believe we can maintain an efficiency ratio in the low 50s next year, even with these slight non-interest 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 [indiscernible] unit 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 flow and be in the mid single digits for next year–that’s this year, 2023.
Total deposits were relatively flat at $19.5 billion for the quarter, and our non-interest bearing deposits still represent over 40% of our deposits, 40.74% to be exact. Then our total non-rate sensitive deposits, we include non-interest 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.
With that, I will wrap it up and turn the call back over to Daisy for any questions from the group.
Question-and-Answer Session
Operator
[Operator instructions]
Our first question today comes from Casey Whitman from Piper Sandler. Casey, please go ahead, your line is open.
Casey Whitman
Hey, good morning.
Nicole Stokes
Good morning Casey.
Casey Whitman
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.
Nicole Stokes
Sure, so yes, our original model beta was about a 23 and our current model beta is about a 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 non-interest bearing, and so for the cycle, we’re at about 15% compared to that original 23 and our current model beta is about 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 margins to be peaking or near peak at this point and that, even though we are asset sensitive, if the Fed moves next week and they have one or two more moves, that we really have that extra beta, that catch-up beta to be able to protect our deposits. We would guide that the margin is stabilizing or peaking now.
Casey Whitman
Mm-hmm.
Nicole Stokes
Then for spot deposit costs at the end of the quarter, I might need to get back with you on that one, Casey.
Casey Whitman
Okay.
Nicole Stokes
I will say that with the latest move there, it’s going to be in CDs, and that our overall CD costs–I mean, I think our money markets and all of those are fairly consistent with what we reported for the quarter, but our CD costs for the spot costs–so our money market spot costs at the end of the year were about 2%, now they’re about [indiscernible] for a total of about 1.53%.
Casey Whitman
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.
Nicole Stokes
Sure, so we–going into this, when we purchased the loan portfolio, which we like that credit and we like that cash surrender value and we like the rate, and so when we model that, we modeled that with some wholesale funding, at least temporarily. The fact that we–when you look at our FHLB borrowings at 1.5 at the end of the year, a third of that was really to fund that portfolio purchase, which is accretive to ROA. So really, the remaining borrowings, about a $1 billion is FHLB borrowing, and we really look at that from a profitability, margin and an ROA perspective. But had we instead of doing brokered deposits–I’m sorry, instead of doing FHLB advances, if we had done broker, which we had room to do that because our brokers 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. We really were looking at that from a profitability and our timing of that and the longevity that we wanted to lock in and the rate [indiscernible], we made that decision from a profitability standpoint.
Casey Whitman
Mm-hmm, okay. Just with the loan purchase, obviously you [indiscernible] with the 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?
Nicole Stokes
This is the acquired piece of the one-time transaction, but we already have–that’s already a product that we offer, is cash surrender 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.
Casey Whitman
Okay, thanks for taking my questions, and great quarter.
Nicole Stokes
Great, thank you Casey.
Operator
Thank you very much. Our next question today comes from Brady Gailey from KBW. Brady, please go ahead, your line is open.
Brady Gailey
Hey thanks, good morning guys.
Palmer Proctor
Good morning.
Brady Gailey
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?
Palmer Proctor
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-boon, 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?
Nicole Stokes
Sure, so our gain on sale this quarter was a 1.26, and we certainly don’t feel like that’s–we feel like that’s definitely going up and that that should stabilize. We’ve said–we originally said about 2.75 to 3 – don’t know when we’ll get there, but I do have some interesting little details I wanted to mention on mortgage. There’s been so much noise between 2019, ’20 and ’21, and so when you 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 in that it’s post Fidelity, it’s pre-COVID, pre-boon, and it’s a fourth quarter, so you’ve got the cyclicality of that fourth quarter.
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 boon, so they’ve definitely become more efficient.
Then when you look at their contribution to the company in ’19, they were about 19% of our net income, and this quarter they’re 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 gravy for us.
When we think about production for next year, I would model about mid-$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 in 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. But I think it would be safe to project kind of in that 2% for next year.
Brady Gailey
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?
Jon Edwards
Yes, I can give you a little bit. Our office portfolio is primarily–we kind of mentioned it on the slide, but really three categories, I guess you’d call them: essential use, meaning that a company needs that facility for a call center or a headquarter building or something along those lines, medical office, and/or credit tenant. We really don’t have kind of CBD offices and really not a lot of just sort of the generic, two or three storey kind of stuff. We really try to focus on those three categories for that portfolio.
As you can see on that slide, there is a level of NPAs of 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.
Brady Gailey
Okay, all right. That’s helpful. 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. 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–you know, with you guys still growing loans and deposits potentially being flat here, should we think about the bond book starting to shrink in 2023?
Nicole Stokes
Great question, Brady. Our investment portfolio as a percentage of assets, earning assets, it’s about 7%, 6.5% to 7%. It would normally run in that 9% to 10% range, and so we have been programmatically buying bonds. In the fourth quarter, we bought about $100 million a month, and so we’ve been growing that bond portfolio. 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 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 are able to consider our securities and our cash in our liquidity ratio, so we keep that liquidity ratio in that 10% to 12%. If you ask where is our kind of minimum there, it’s that 10% to 12%, between those two, so that’s where we are.
I would expect to see cash kind of staying at that 5% and then, depending on 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 about [indiscernible] here, is just kind of our loan to deposit ratio at 102 and that people see that maybe 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. If you take loans plus investments to deposits, 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 the AOCI impact becomes realized and affects their regulatory capital, so we have used some of our loans and some of our loan purchases to offset the bond portfolio, so we really view that together.
Then on the liquidity funding side, our brokered CDs, I think we’ve already said it probably twice, but we really have minimal brokered money – it’s less than 1%, and our FHLB borrowings are less than 6%, so we have room on the liquidity side, and like I said earlier, if we had not done the FHLB advances and we had gone the brokered deposit route instead, that loan to deposit ratio would be less than 95% and it wouldn’t be quite the outlier. But again, we manage that funding source from a profitability and ROA perspective and margin perspective.
Brady Gailey
Okay, that makes sense. Thanks guys.
Operator
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.
Christopher Marinac
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?
Nicole Stokes
Give me one second. Sorry for the dead silence for a second. I want to make sure 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, so I’ll get back with you on that.
But I would say at this point that anything that’s cash flows off the bond portfolio, I would consider reinvesting that into the bond portfolio to kind of still keep it at that 7%.
Christopher Marinac
Okay, that’s helpful.
Nicole Stokes
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.
Christopher Marinac
Okay, not a problem. Thank you for that, that’s helpful.
Then outside of the purchase–
Nicole Stokes
Sorry, I was going to mention, the duration on the portfolio is about three years.
Christopher Marinac
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.
Nicole Stokes
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.
Palmer Proctor
And Chris, you know, 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 powder you want to put to use in certain asset classes, what it allows us and all banks to do is kind of have a focus on what they’re going after. 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 equivalent finance type of activities. We’re really encouraged by that.
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 it 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 three 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 at 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.
Then the second thing is the C&I small business growth, and then third is focused on more of the customer experience. Those are really our three main focuses for next year, and I think that’s going to serve us well as we navigate through the remainder of 2023.
Christopher Marinac
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.
Palmer Proctor
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.
Christopher Marinac
Great, thank you both for the background and information this morning.
Palmer Proctor
You bet.
Nicole Stokes
Thank you Chris.
Operator
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.
Palmer Proctor
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.
Operator
Thank you everyone for joining today’s call. You may now disconnect your lines and have a lovely day.
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