Ameris Bancorp - Q1 2023
April 28, 2023
Transcript
Operator (participant)
Hello everyone, and welcome to the Ameris Bancorp first quarter earnings conference call. My name is Bruno, and I'll be the operator of today. During this presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. I will now hand over to your host, Nicole Stokes, Chief Financial Officer. Nicole, please go ahead.
Nicole Stokes (CFO)
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 Spangler, 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 and 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. With that, I'll turn it over to Palmer for opening comments.
Palmer Proctor (CEO)
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 had really positioned us well for 2023. I also mentioned the importance of teamwork and our ability to stay focused on core fundamentals. That message couldn't have been more timely, as just five weeks later, we faced the banking disruption, where the value of balance sheets and stable deposit bases are really proving the importance of core banking relationships here at Ameris. We actually saw deposits grow from March 10th 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 due to 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. 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 watch list 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 pre-tax, 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 the first quarter of last year. Nicole is going to talk to you in a minute about the margin details. I did want to mention that we are still running above peer at 3.76%. 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.
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%. We've clearly got a proven culture of expense control and solid capital and liquidity positions. Most importantly, when you look at where we're positioned with our seasoned 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.
Nicole Stokes (CFO)
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%. Remember, these are both after the $49.7 million provision expense. 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. We had about $900 million of excess cash in our balance sheet at the end of the quarter. That negatively impacted our TCE by about 30 basis points. Without that excess cash, it would have been 8.85. We've already used that excess cash to pay off about $950 million of FHLB advances during the first few weeks of April. Those were at an average rate of 4.85%. Our net interest income for the quarter increased $22 million over last quarter and $112 million from the first quarter of last year.
In comparison, our interest expense increased $34 and a half million this quarter compared to $73 million. I'm sorry, compared to last quarter and then $73 million when you compare it to the first quarter of last year. Our net interest margin remains strong at 3.76%. Our yield on earning assets increased by 34 basis points, while our total funding costs increased 65 basis points. Our margin declined 27 basis points, and there was really three contributing factors there. First, we had about 18 basis points of decompression due to the negative deposit mix that was non-interest bearing, kind of transitioning to interest bearing. We had 14 basis points of beta catch up, and that's typical when you near the end of the cycle.
Those two negatives were offset by five basis points of expansion because of higher loan yields and average balances. Due to the competitive pressures and the banking turmoil events 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 this cycle at 23%. We continue to be slightly asset sensitive, with NII increasing less than 2% in an up at a 100 environment, as we've been programmatically repositioning our balance sheet closer to neutral. Remember, we started this cycle with about 7% asset sensitivity. We've definitely worked to get closer to neutral there. We've updated the interest rate sensitivity information on slide 10.
Total non-interest expense increased four and a half million dollars 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 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 and liquidity of $900 million that I already spoke about, and then loan growth of about $142.6 million.
That represents an annualized loan growth ratio of 2.9 for the quarter. 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 were a lot of ebbs and flows within that, really we had about $400 million of that was expected and usual cyclical municipal and ag 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, something happened to the business. We really only had about $70 million of declines of deposits going out, where they were going to higher rate, 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 as some of the banking turmoil really sparked customers look at their, at their rate. We saw very little movement of non-interest bearing deposits actually leave the bank, and 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.
Our uninsured, uncollateralized accounts have remained stable, and they actually improved this quarter to just under 30% at 29.5% of total deposits. With that, I'll wrap it up and turn the call back over to Bruno for any questions from the group.
Operator (participant)
Perfect. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. To withdraw your question, press star followed by two, and please do also remember to unmute your microphone locally if it's your turn to speak. We have our first question from Casey Whitman from Piper Sandler. Casey, your line is now open. Please go ahead.
Casey Whitman (Managing Director)
Hey, good morning.
Nicole Stokes (CFO)
Good morning, Casey.
Palmer Proctor (CEO)
Good morning, Casey.
Casey Whitman (Managing Director)
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 margin sort of ended the quarter, either in March or at the very end, if you have it? Just so we can sort of get a sense of where we're starting for second quarter.
Nicole Stokes (CFO)
Sure. For the, for kind of the month of March, we were in the about the mid 360, about a 363. If I'm guiding margin, I wanna make sure everybody realizes that the biggest contributor to margin at this point is the mix of deposits. That's kind of the, I'm gonna say, the wild card in this. Assuming that we can maintain our mix, and it has slowed, 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 basis point-20 basis point compression in the second quarter, assuming deposits remain at the same mix that we have today.
Casey Whitman (Managing Director)
Okay. Is the assumption that you could sort of hold that the back half of the year, or do you think we should maybe assume more compression from there?
Nicole Stokes (CFO)
I think, and, it's a great point, and I think, we've been talking about that, you know, the longer that the Fed holds, that the tighter the margin is gonna get just because more customers are... We're just gonna continue to see that deposit pressure. On the deposit pricing, I mean, everybody's fighting for the same deposits today. I do think that a lot of it depends on the Fed, but the longer they hold, I think we could have some room kind of going into the third and fourth quarter for additional compression.
Casey Whitman (Managing Director)
Okay. Understood. Switching gears, can you remind us sort of your threshold for how big you would let that equipment finance loan book get, and sort of how that applies to the new updated loan growth guide you just gave, sort of how much growth would come out of that particular group?
Jon Edwards (Chief Credit Officer)
Yeah. What we've said from the very beginning was that it would never exceed more than 10% of our balance sheet. The other thing too that Nicole touched on in her comments is that one of the things across the board that we're looking at is we're not gonna allow loan growth to outpace deposit growth. That will be our governor going forward. 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.
Casey Whitman (Managing Director)
Okay. Thank you. I'll pass it to Nicole Stokes.
Nicole Stokes (CFO)
Thank you, Casey.
Operator (participant)
Our next question comes from Christopher Marinac from Janney Montgomery Scott. Christopher, your line is now open. Please go ahead.
Christopher Marinac (Director of Research)
Hey, thanks. Good morning, Nicole and Palmer. Just wanted to add on to the deposit 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 federal funds rate, given what you were just saying a second ago?
Nicole Stokes (CFO)
No, it really is the federal funds rate. It's the latter of those two options.
Christopher Marinac (Director of Research)
Got it. Okay, thanks for that. Then, back to the equipment finance area. What would be a good loss rate from that area? I presume that that's driving a little bit of the charge-off change we saw this quarter.
Jon Edwards (Chief Credit Officer)
It was predominant in the charge-offs this quarter. You know, their loss rates, we looked at over the due diligence period we had. I think their high period was in the three's. You know, the losses that we had this quarter are somewhat indicative of some of the collateral that we had, specifically some light-duty trucks that are just sort of getting a little bit hammered in the marketplace. You know, overall, we did forecast when we did due diligence an increase in our loss rate for that purpose. We expected some increase in charge-offs just because that was how we modeled it. Just remember that, you know, the division continues to perform at the higher end of the contribution in pre-tax, pre-provision.
kind of that net spread is still pretty positive for for the bank overall.
Christopher Marinac (Director of Research)
Great. Yeah, that was gonna be my other question. You're happy with the spreads there. In general, is the new loan yield going on kind of rationing up with the overall portfolio, or is it even going up faster than the overall Ameris loan portfolio?
Jon Edwards (Chief Credit Officer)
It's, you know, it does end and flow depending on the kind of quality that we put in there, but it's been, it's remained in double digits throughout the first quarter. You know, it's not outpacing necessarily the rest of Ameris, but it's certainly keeping pace with the market.
Christopher Marinac (Director of Research)
Great. Then this last question, this has to do with the build in the allowance, from here, do you feel that there's some flexibility on provisions just given that you've grown the reserves a lot this past quarter?
Nicole Stokes (CFO)
Sure. I'll take that one. You know, the thing is, when you look at the, when you look at the model, we use the CRE price index and the home price index within our model. What really happened is we had a quarter that fell off this quarter of good CRE pricing forecast, and we added the, you know, that rolling quarter, added a quarter that was not good. It really has to do with it's the same anomaly. I think what you're asking is the same anomaly gonna happen next quarter. Right now, we do not anticipate that being as severe.
Obviously, Moody's forecast, you know, will update between now and then, assuming that the CRE price index doesn't fall further, or the forecast for that doesn't fall further, I would expect that that reserve build is fairly complete.
Christopher Marinac (Director of Research)
Got it. Great. Thank you all for the information this morning.
Jon Edwards (Chief Credit Officer)
Thank you, Chris.
Operator (participant)
Our next question comes from Brady Gailey from KBW. Brady, your line is now open. Please go ahead.
Brady Gailey (Managing Director)
Thank you. Good morning, guys.
Jon Edwards (Chief Credit Officer)
Good morning.
Nicole Stokes (CFO)
Good morning.
Brady Gailey (Managing Director)
One more question on the reserve build. Was there anything in Ameris' results that drove the reserve build? I mean, when I look at your asset quality, it looked, you know, fine in the quarter. Is there anything, you know, that you're seeing that makes you more cautious to build the reserve here?
Jon Edwards (Chief Credit Officer)
No, there was not. What we're seeing is pretty reflective of what you see in the results in our credit there. This was, I think, a prudent move on our part, driven by the model. Nothing more than that, if that answers your question.
Brady Gailey (Managing Director)
Yep. All right. With deposits being the governor on loan growth. Yeah, 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?
Nicole Stokes (CFO)
Yes, kind of that 3% to 5%. You know, obviously, we would love to grow deposits more than that, specifically non-interest bearing. I think at this point, our internal goal and projections are that 3% to 5%.
Brady Gailey (Managing Director)
All right. Last for me, just on mortgage. You know, 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, you know, your forecast for mortgage for the rest of the year?
Jon Edwards (Chief Credit Officer)
Yeah, I'm gonna tell you right now, we're pretty bullish on what we're seeing for this quarter. You know, this is spring season, which traditionally, there is seasonality to this business. As we said last quarter, it's kind of reverting back to that outside of any economic issues that may come up. Right now, the pipelines are pretty solid. The margins are improving. You know, that's the other thing that's really the highlight of this company too, is when you look at compressional margin, our ability to generate non-interest income through areas like Premium Finance, through areas like mortgage, it just shows you the actual benefit of diversification. A lot of those mortgage fees that we generated this quarter were allowing us to offset a lot of that decline that we saw.
I think mortgage will continue, at least for the immediate future, to be pretty consistent with what you saw this quarter.
Brady Gailey (Managing Director)
All right. Thanks for the color.
Jon Edwards (Chief Credit Officer)
Mm-hmm.
Operator (participant)
Our next question comes from David Feaster from Raymond James. David, your line is now open. Please go ahead.
David Feaster (Director and Senior Equity Research Analyst)
All right. Good morning, everybody.
Jon Edwards (Chief Credit Officer)
Good morning.
David Feaster (Director and Senior Equity Research Analyst)
Maybe just following up on the growth side again. You know, first of all, I'm curious where new loan yields are if we exclude Balboa. Then maybe where do you expect growth to be driven by? Where are you seeing good risk-adjusted returns at this point?
Jon Edwards (Chief Credit Officer)
Well, I would tell you know, equipment finance is a, is a different, obviously a different animal, as you touched on. In terms of the growth opportunities, we're still seeing some meaningful opportunities in our commercial book, and the C&I book. The upside to it for all banks, from what we're hearing and seeing and know from the competition, is that we're able to be a little more selective in terms of pricing and expectations with equity and deposits. Most of the coming on rates that we're seeing in the commercial book are, you know, 7%+ which is very encouraging to see, especially if there are deposits associated with that, meaningful deposits. That's really where we see additional opportunities.
You know, one of the things that we are actually spoiled with is being in these 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 opportunities as we go forward.
Nicole Stokes (CFO)
David, those coming on rates.
David Feaster (Director and Senior Equity Research Analyst)
That's helpful. Yeah.
Nicole Stokes (CFO)
Yep. Those coming on rates in the first quarter, excluding the kind of the Balboa and the lines of business, total production was about an 8.72%, and that was split, fixed rate was 9.40% and variable rate was 7.68%.
David Feaster (Director and Senior Equity Research Analyst)
Okay, that's helpful. That $872, that's including Balboa or that's excluding Balboa?
Nicole Stokes (CFO)
That's excluding the equipment finance.
David Feaster (Director and Senior Equity Research Analyst)
Okay. Wow. Okay. You know, obviously there's a hyper focus on CRE at this point. You know, I'd just love to get kind of what are you seeing in that book? Appreciate all the color that you guys put in the slide deck. Obviously you've got tight underwriting standards, low LTVs, and all those kinds of things. I'm just curious, as you look out, is there anything that you're seeing, maybe segments you're avoiding or watching? Are you tightening standards there? Or on the other side, I mean, as a lot of other banks are pulling back, does that create an opportunity for y'all and maybe give you some more pricing power and opportunities?
Jon Edwards (Chief Credit Officer)
Well, from the perspective of opportunities, as Nicole mentioned, I mean, our opportunities will be governed by the ability for loan growth or deposit growth. The short answer is yes, we are seeing opportunities. Some of that pullback or that tightening you mentioned, it's 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, you know, may have been acceptable at a five and a half or a four and a half rate. You know, you've got to rightsize that again at a, you know, a going in rate of seven and a half.
Some of that is kind of, you know, self-tightening just because of the underwriting that's being done in the rate environment. I don't think you see us necessarily shying away from anything that's not sort of already in the marketplace. You know, 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, you know, we put out a call for our folks to do more owner occupieds, and they responded, and you saw that in our slides also. You know, we've got several lines that help us to not have to rely on, you know, CRE projects, in this kind of winter of CRE.
that will help us to continue with the overall loan growth, but, and not having to see it necessarily come from CRE loans.
David Feaster (Director and Senior Equity Research Analyst)
Okay, that's helpful. Maybe just touching on the non-interest-bearing deposit front, you know, appreciate the commentary on it really being a migration. Glad to hear we're not seeing any, you know, customer attrition or anything. 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? Do you think that NIB composition can kind of hold here in that mid-30 realm, mid-30% realm?
Nicole Stokes (CFO)
I think the pressure is still there. You know, we're doing everything we can to retain those deposits. Has it slowed? Absolutely. Is the pressure still there? Yes. 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 rates. I apologize for that. Fixed was 6.35%, variable was 7.68%, and all-in was 7.17%. I looked at the wrong chart. I apologize.
David Feaster (Director and Senior Equity Research Analyst)
Okay. That's helpful. All right.
Palmer Proctor (CEO)
David, to your point, which I think is a good one, there are a lot of people with excess cash balances that are utilizing their own cash rather than borrowing money at these 7%+ rates too. I think a lot of the pressure that we're gonna see going forward as an industry, I think a lot of the movement has already taken place for people looking for higher yields on excess cash. Also, you're gonna see a lot of that excess cash being put to use as opposed to paying higher rates on their borrowing. That will be a new challenge out there that we'll have to face, especially when obviously on the commercial front.
David Feaster (Director and Senior Equity Research Analyst)
Yeah. Understood. I appreciate all the color. Thanks, everybody.
Palmer Proctor (CEO)
You bet.
Operator (participant)
As a reminder, ladies and gentlemen, to ask a question, please press star followed by one on your telephone keypad. That's star followed by one on your telephone keypad. Our next question comes from Russell Gunther from Stephens. Russell, your line is now open. Please go ahead.
Russell Gunther (Managing Director and Equity Research Analyst)
Hey, good morning, guys.
Palmer Proctor (CEO)
Good morning, Russell.
Russell Gunther (Managing Director and Equity Research Analyst)
Wanted to... Hey, good morning, Palmer. On the non-interest expense side, you know, really good result this quarter. You guys talked about pretty intense focus there. Could you share some thoughts around run rate expectations going forward?
Nicole Stokes (CFO)
Sure. We do expect some slight increases, mostly in the salaries and benefits section. We really do have a very tight expense control discipline, and we are looking at every expense. You know, there's the continuation of things to look at, including leases, including travel, you know, just other categories that we continue to look at, looking at projects and deciding what is a need versus a want and what needs to be done versus what can maybe wait, you know, three to six months. We are certainly continuing to do that. I would say, a slight...
When I say that, I'm prefacing taking out mortgage from that because obviously as mortgage production could potentially ramp up or expect to ramp up in the second and third quarter from the normal cyclicality, we'll have some increased commissions there, some of their variable costs. For everything else outside of mortgage, it's a low, low, you know, 3%-ish increase.
Russell Gunther (Managing Director and Equity Research Analyst)
Okay. That's really helpful, Nicole. Thank you. Just last one for me. You know, you guys have really solid capital levels on a TCE basis as well. Just thoughts on the buyback here and getting more active?
Palmer Proctor (CEO)
Yeah. It's awfully tempting at this kind of currency price where we are today, that's certainly an arrow we have in our quiver. It's certainly something that we'll give consideration to in this next quarter.
Russell Gunther (Managing Director and Equity Research Analyst)
All right, great. I appreciate it, Palmer. Guys, the rest of my questions were asked and answered. Thanks very much.
Palmer Proctor (CEO)
You bet.
Nicole Stokes (CFO)
Thank you, Russell.
Operator (participant)
We currently have no further questions, so I'd like to hand back to Mr. Palmer for closing remarks. Please go ahead.
Palmer Proctor (CEO)
Great. Thank you, Bruno. I'd like to thank 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. 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.
Operator (participant)
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.