Ameris Bancorp (ABCB) Q2 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ameris Bancorp Second Quarter 2017 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Dennis Zember, Chief Operating Officer. Please go ahead.

Thank you, Phil, and thank you to all of you for joining us on today’s call. During the call, we will be referencing the press release and the financial highlights that are available on our Investor Relations page on our website at amerisbank.com, or on the SEC’s website. I’m joined today by Ed Hortman, President and CEO; and Nicole Stokes, our Bank’s Chief Financial Officer. Ed now will be making most of the opening comments and we’ll all be available for Q&A after we’re done. 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 materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update these statements as a result of new information, early developments or otherwise, except as required by law. During the call, we will discuss certain non-GAAP financial measures in reference to the company’s performance, and we have a pretty exhausted reconciliation of these measures and our GAAP financial measures in the appendix to our presentation. And with that, I will turn it over to Ed Hortman.

Thank you, Dennis, and good morning, everyone, and I would like to thank you as well for joining us this morning in our second quarter earnings call. We’re excited about the updates we’ll provide you this morning and proud of the kind of quarter that our bankers produced. I’ll discuss briefly the results and then provide an update on BSA/AML. I’m proud to report our 6th consecutive quarter with top quartile operating ROA. We’ve been focused on several initiatives, while achieving consistency and quality earnings metrics and earnings growth is at the top of our list. We’re reporting operating earnings of $23.5 million, or $0.63 per share for the second quarter 2017. Earnings are higher by about 15%, when compared to the same quarter last year. Our earnings per share is higher by about 8% and reflects the impact of the capital raise we completed in the first quarter. Our operating results differ only slightly from the actual results in the quarter and as a result of about $371,000 of after-tax losses we had on the sale of previously closed branches. Our operating ratios were mostly steady in the second quarter. Operating return on assets came in at 1.32%, compared to 1.33% in the same quarter in 2016. Our reported margin, including accretion tightened by 6 basis points to 3.95 as the level of accretion continued to decline, but we more than made up for this decline with improved operating efficiency. Our operating efficiency in the current quarter improved to 59.37% compared to 61.93% in the same period a year ago. Tangible book value increased nicely to $17.24 per share and our tangible capital ratios were substantially unchanged during the quarter, despite the strong growth we reported. We forecasted organic loan growth during the year to come in around 20%, and our year-to-date growth rates are slightly ahead of those expectations. We started the year off on a slow pace, but had a very impressive second quarter with organic growth of $391 million, or 32%, annualized. For the year-to-date period, we’ve grown organic loans at a 21% base. The growth was diversified and not solely limited to one asset class. We’ve had impressive growth in our lines of business that are C&I oriented and CRE and in residential lending, because we’re not focused predominantly on one asset class, our CRE cost prices were stable at 229% and CD with 73%. Dennis will give a little more color on the asset growth and on deposit growth. But suffice it to say, we’re still not funding as much of our loan growth with low-cost core deposits as we would like. During the quarter, we grew deposits by about 10.4% annualized, or just over $150 million. We’re more confident in our competitiveness on CD and money market pricing at the end of the quarter than we were earlier in the year. We’ve forecasted that we would be more aggressive on deposit pricing, as loan yields new tier and this is what we experienced in the second quarter. Our margin, excluding the effect of accretion was 3.77%, tighter by a couple of basis points against the linked-quarter, where we reported 3.79%. All this decline resulted from the higher cost associated with our subordinated debt offering, which we completed late in the first quarter. We saw an update increase in loan yields and yields on earning assets that we were able to move more dramatically on deposit costs and believe that we will be able to materially improve our competitive position on deposits without materially impacting our margin. I expect that we would be able to see better deposit inflows in the coming quarters from our current pricing position and do not anticipate that the pace of increase in deposit rates will continue going forward. Non-interest income rebounded of our lower first quarter as we’d expect that it would – it came in at $28.2 million, about 200,000 lower than a year ago. Mortgage which has been the biggest driver of our non-interest income success grew from a production standpoint. But gain on sale margins have tightened as the competition for purchased business becomes more pronounced. Our gain on the sale of margin came in at 3.46%, up 1 basis point from the prior quarter, but down 44 basis points from a year ago. Net income in the retail mortgage group increased in the current quarter by 13.3% compared to the same period a year ago. And while this is a slower growth than our historical growth rate, we feel confident that mortgage can still grow profits at about the same pace as the bank through additional hiring and gains in efficiency. I’ve touched on this earlier, but we’ll repeat that we managed another quarter with an operating efficiency ratio below 60%. I’m especially proud of what we’ve done here, because we’re still ramping up an equipment finance, and we’ve made substantial investments in BSA that go significantly above the standards that the FDIC is expecting. We’ve managed to extremely tight as we work through the BSA order, deploying incremental investment dollars into the BSA/AML infrastructure. We noted in the pressure release that at the end of the quarter, we’re at a full run rate of staffing in BSA, while expect its expense bear from this department to moderate significantly. As we previously stated, we have all the production talent we need right now growing the company. But I’m confident that between our growth rates on earning assets and revenue combined with our run rate on operating expenses, we can stay in the efficiency range that we’re currently operating. On the BSA/AML program, we expanded some of the rules and assumptions in our look back process at the behest of FDIC that pushed our estimated completion date on the look back into August versus our targeted date of June 30. Our regular exam starts September the 5th, and I can assure you, we’ve not only compiled with each element of consent order, we built the BSA/AML programs sparing no expense that is ordinarily comprehensive, and while completely scalable it’s currently staffed and resourced and accommodated by the priced assets and customers as we have today. I’m very confident that our systems and the progress we’ve made in our program and then what I believe will be the outcome of our exam. One the M&A front, we’re continuing to have more serious discussions with management teams and boards of potential acquisitions and we’re ready to participate in an M&A once we exit the order. So, Dennis with that, I’ll turn it back over to you.

Alright, thanks Ed. Let’s start with some of the details affecting the margin. For the quarter, we are reporting a 3.77% margin excluding the effect of accretion by 2 basis points from the first quarter’s result. Again, the difference there, what Ed said, the additional expense associated with the subordinated debt offering caused that decline. Leading that to the quarter, the Fed’s right movements have been positively impacting our loan yields, but our production yields has always been slightly behind our overall portfolio, mostly offsetting the pick up that we normally would have seen. The second quarter was different, okay our production yield came in at 4.57%, as you can see in our investor slides, which was 1 basis point higher than our beginning portfolio yield of 4.56%. The right movement that occurred on June 15, so the effect of that movement is only minimally reflected in loan yields for the quarter. Collectively, we don’t see anything that’s dilutive to loan yields going forward and we expect the pace of movement here will pick up as we move in the second half of 2017. On the interest expense side, we’ve used most of the upward energy on earning assets to get more aggressive on deposit rates to drive better deposit flows. In the quarter, we moved higher on deposit costs by only 4 basis points, but the move on CDs and money market accounts was more pronounced. We finished the quarter in a much more aggressive posture, especially on our larger accounts and we do not anticipate that a similar pace of increase on despots is necessary moving throughout the year. The competitive thing we tried to achieve on deposits did actually start to move more deposits in and although we came at short relative to loan growth, we did have a 10% annualized growth rate in deposits, which considering the outsized market shares we have in our legacy footprint, we’re pretty pleased with. Altogether, we’re pretty confident that we can hold the margin that we reported this quarter and potentially add 1 basis point or two as we move to the end of the year. I mentioned deposit growth there, so let me backup and talk real quick about loan growth. We had a great quarter on organic loan growth and generally the second and third quarters are best quarters for growth. I’m pleased that we are diversified as we are on our efforts as we have been in the past. During the second quarter we had a strong growth in our C&I efforts, growing municipal mortgage warehouse premium finance and equipment finance collectively by about $190 million, which is about 49% of our reported growth. Residential lending was about $60 million, consumer was about $30 million which leaves about $110 million for CRE growth or about 28% or so of what we did in the second quarter, we’re pretty pleased with that. And again like Ed mentioned, it barely moved our concentrations on CRE or construction. When I’m looking at the pipeline, I’m thinking about the rest of the year, I think that we’ll see stronger growth from equipment finance as we said in the press release and as those approved lines begin to fund and that CRE will be stronger just from what we see in the pipeline and the kind of opportunities that are in front of us. Municipal may fall a little given how hard it is to find the yields that we’re looking for, and of course warehouse is cyclical, so we expect a good third-quarter, but a traditional softer fourth-quarter. Summarizing and I guess repeating what Ed said or alluded to earlier, we’re still confident that we’re right on track to hit our 20% growth forecast for this year. A quick comment about the reserve, we finished the quarter with a total reserve of $25.1 million, which does not include credit marks. Of course we carry very small reserves on municipal premium finance and the purchase mortgage costs and when you exclude those balances and their reserves, we have about 70 basis points of reserves on the legacy portfolio compared to 67 basis points in the prior quarter. We also have non-accretable credit marks on the acquired portfolio and when you include those, the 70 basis points that I was just mentioning goes to 113 basis points, which is down from a 124 in the first quarter of this year, but again notable that it’s over 1%, given the headline reserve percentage. We did have more net charge-offs this quarter, which related to existing specific allocations on three or four non-accrual assets, where we think there’s going to a resolution in the next few months and basically in the third quarter. None of that charge-off activity related to new in migration or is reflective of a quality issue in the portfolio. Lastly, on our operating expenses and efficiency ratio. For the quarter, and I know Ed mentioned this, but given how hard it was to get below 61%, we want to repeat this, we are reporting an operating efficiency ratio of 59.4%, which is a very slight improvement from the first quarter’s level. We’ve been pretty steady at the bank level on expense additions using most of our spare resources on administrative areas like Bank Secrecy Act or a Customer Care Center. Going into the third quarter, our current level of production resources are right where they need to be. We don’t see a lot of investment that’s needed there. At the administrative level, I’ll tell you that we’re much closer to being fully invested here, and we don’t expect much growth in the second-half of the year on at the admin level. While we want to see some continued improvement in efficiency, the pace of improvement in between the first and second quarter is probably the right pace for us throughout the rest of this year. So with that, I’ll turn it back to Phil to see if there are any questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Tyler Stafford with Stephens. Please go ahead.

Hey, good morning, guys.

Good morning, Tyler.

Good morning, Tyler.

Congratulations on a nice quarter. Ed, maybe just to start on M&A, I guess, it’s been a year-and-a-half or so since you guys did the JAXB deal. And I’m just curious going back to some of your earlier M&A commentary. How the pricing environment as today versus the last year-and-a-half or so. And if you still think that the financial metrics that you’re able to get in past acquisitions are still achievable today with where pricing is at?

Tyler, we still think M&A is a pretty big part of our strategy going forward. And I said in my earlier comments, we’re really confident on what we think the results of the exam should be and will be. And looking at that deal pricing, there’s still some unrational expectations, but there are also I think several executable deals that are priced in my mind where they should be. So what I’m talking about is deals that would be – that would not be diluted to book value, that would be very, very minimally diluted, but would be appropriately accretive to earnings. So – and in our – with our current sheet, we still have some advantage there. So I think absolutely there’s some opportunity for us in the near-term.

Okay. Thanks, Ed. And maybe just I guess within M&A in terms of what you’re looking for, obviously deposit growth has been a challenge, and just given the organic growth you’ve got on the loan side, are you – I guess, primarily focused on kind of deposit heavy franchises or banks that might give you a new lending vertical or new metric presence, any just commentary there?

Well, I’ve got my Christmas list. But when I was a little boy, I never got everything that was on my list. So clearly what’s important for us is something that’s going to be accretable to earnings to justify the risk and the execution of the deal. But also we want to be in markets that are long-term accretive to our franchise that have the right demographics. Clearly, deposits are really important. And we said previously that for us this year, it’s going to be the growth quality deposits at the rate of loans. And so we still have a big focus on that. We don’t have any big campaigns or programs that are going to increase our costs, but we do have a huge emphasis and incentive plans geared towards deposit growth – core deposit growth. So, we’d love to see a transaction and I think could see a transaction that would either be deposit rich or be in a market where deposit growth would exist.

Okay, got it. Dennis, maybe just on fee income and the mortgage business. Should we still expect to see a large step-up and again on sales with margins in the third quarter with the Ginnie Mae issuance. And just remind us, how much of your production is government guaranteed and what that impact again on sale margins could be?

Okay. A real quick on mortgage, we did about 89% of our production was purchased. The $400 million, about $150 million is government, we – in the call when I talked to the mortgage president yesterday and we are issuing our first, Ginnie Mae, I think in the next week or so and we think we’ll do about $100 million of that in the third quarter, probably pick up about 50 basis points or so on that, I think that maybe a $0.5 million pickup as we ramp and that 50 basis points is probably on the low end of what Ginnie Mae has added being over 100 basis points, but we were comfortable that we’re going to get about 50 basis points on that portion of the production, generally that’s about 40% or so of our production that would qualify.

Okay, got it.

And I will say, let me just – one more thing about mortgage, Ed mentioned mortgage, it’s been – we’ve been used to seeing mortgage growing at 15%, 20%, 25% and we’re growing mortgage still, like Ed mentioned, income there, net income is up 13%. We’re flat number of mortgage producers and we’ve got a heavy focus right now on recruiting the kind of mortgage bankers that can give us confidence that next year we’ll be about to grow mortgage at the pace as the bank. That’s more what our goal has been having mortgage outpace the growth of the bank.

Okay, good all right. And then maybe just last one for me. I appreciate the new retail commercial real estate slide in the deck. After going through that deep dive, I’m just curious if there is any interesting findings or conclusions you guys came to about your retail CRE portfolio.

I’ll answer first and Dennis can add if he likes, however, I don’t – I mean there is no surprise to us, this is something that we’re watching, look at on a regular basis, but I mean we are pleased with the portfolio quality, our big emphasis in the last few years has been to improve the risk profile of the earnings assets and we believe we’ve done that and when we look at that graph that we put in there, I mean, we’re pretty comfortable with the coverage ratios and the collateral coverage ratios. If you have…

No, that’s perfect.

Okay, thanks guys.

The next question comes from Brady Gailey with KBW. Please go ahead.

Hey, good morning guys.

Good morning Brady.

Maybe one more question on M&A, you all talked about geographies that are accretive to your franchise, what geographies do you have the most interest in acquiring into?

Let’s say, Brady if you look at, if you look at where we’re located and we try to leverage some of our current staff and then you layer on markets that have the opportunity for really strong deposit growth then you’re looking at the larger MSA markets, the same markets where we’ve been successful with asset growth. And primarily there you’re going to be looking at Jacksonville and Atlanta, and then in South Carolina a couple markets there. So, those are the most logical.

Okay, that makes sense. And then if you look at discount accretion, it’s been running the kind of plus or minus $3 million a quarter for the last year, so is that – I expect that will probably continue or start to decline over time, what’s the right way to think about levels of discount accretion over the next year or so?

Brady, we finished the quarter with about $25 million of non- accretable. We finished the quarter with about $9.5 million of accretable. So, the accretable is going to slow down, I guess it was 2.8 or 2.9 this quarter. I think it’s probably going to come in $300,000 or $400,000 a quarter for the next few quarters. Now some of the – I’ll tell you, some of the $25 million non-accretable keeps getting moved over the portfolio quality and the resolution on the asset that have those mark continue to improve, so you can’t just compare the $9 million with the $3 million run rate, because the pace of the non-accretable moving over is actually little faster than what we experienced maybe a couple years ago.

Alright that’s helpful. And then finally for me, you talked about kind of holding the margin where it’s said, maybe adding a basis point or two from here, are you talking about the core margin there or the reported margin?

Yes, the core margin at 3.77%. And our – coming into the year and in discussions with analysts and investors is, we did not think that we needed to grow earnings or earnings-per-share to hit our target with margin expansion. We really budgeted and forecasted maintaining a margin with the kind of growth we were doing and just getting the earnings growth from what we saw capping on the balance sheet. We’re looking at other releases too and we’re one of the few banks that’s sort of holding the margin. We’d like to see some margin expansion, but we think we got enough balance sheet growth to hit the numbers, and given where we are getting the growth on the asset classes, I just don’t know that we’re going to be able to move that 3.77% margin close to 4%.

Alright, great, thanks guys.

[Operator Instructions] The next question comes from Casey Whitman with Sandler O’Neill. Please go ahead.

Good morning guys.

Good morning Casey.

Just a follow-up on the margin outlook. What are you assuming for rate hikes to get there?

Well, going forward Casey, we’re not really expecting and we’re not forecasting any rate hikes. So, given that where we think the margin, given the margin at 3.77%, we think we are – we can hold that margin with no rate hikes is what we are assuming.

And Nicole is here telling me, let me – Casey, let me jump in, Nicole is telling me that I have, which is the numbers, we have $25 million of a accretable and $9.5 million of non-accretable, I apologize, I had said that backwards. Okay, go ahead Casey, I’m sorry.

Got it and you guys talked about how you are feeling on deposit costs, it sounds like you are feeling better about that here, so wondering what’s driving, what’s really driving that optimism compared to how you were feeling earlier this year?

It’s – when I look at our largest money market account where we really got aggressive in the quarter on a select group of money market accounts where we wanted to be defensive, to stop the outflows. And so once we got those money market accounts into the – well, I don’t want to say on the call, but once we got those money market accounts into a pretty aggressive posture, we feel a lot more confident that the outflows will drive down and we were experiencing some may be a small amount of, I mean a good amount of deposit sales, but then take an amount of deposit runoff. And so we think we’ve stopped a good bit of the deposit runoff or will have stopped a lot of that, just given where we’ve got deposit prices.

Okay and then my next question was, just considering your trajectory for organic loan growth up against purchased loans and loan pools coming down, what’s your outlook for overall balance sheet growth quarter-to-quarter?

As about what it was this quarter, we did about 15% growth this quarter. We don’t think we’ll do – I mean most of the difference comes in maybe some security investment portfolio, coming in a little, being a little smaller and from the purchase mortgage pools running off. We don’t have a lot of excess cash that’s able to be deployed, so we’re doing about 20% loan growth on the organic side, it really amounts to about 15% on the balance sheet.

Okay and then last question, now that the completion of look back has been pushed to around August, you got the exams starting in September, when do you think is the earliest you could possible get out from the order?

Casey, the exam – actually the exam starts before September 5th, but they’re in the bank beginning September 5th, they would typically be here four weeks. So then their process, I can’t speak today, would not expect it before the end of September for sure. But I think, the first week or two of September will have a really good feeling when they confirm what we know.

Great, thanks for taking my question.

I’ll go ahead and add that, BSA/AML, we completed everything within our control and the look back will be completed sometime during the month of August. So, we expect with the exam coming.

Alright, great quarter, thanks.

[Operator Instructions] The next question comes from Peyton Green with Piper Jaffray. Please go ahead.

Yes, good morning Dennis and Ed, I’m sorry if I missed this from earlier comments, I’m a little late jumping on. But if we just kind of think year-over-year, well, average loan growth is about $1.50 billion and the deposit growth was about 6.14. What kind of – how comfortable are you letting the loan to deposit ratio move up going forward? And then what do you think – how optimistic are you that you can grow dollar volume deposits in line with dollar volume of loan growth net of the mortgage pool run off?

That’s a good question. You know the deposit – I mean on the loan side and you’ve heard us talk – say this to investors. I mean on the loan side we’ve been creative, we’ve got lines of business and are being battled on loan growth with four, five different strategies. But on the deposit side we are still a little too reliant on just sort of a branch footprint and sort of hand-to-hand combat honestly. You know, Ed said earlier, that we don’t have any deposit campaigns. I mean we’re of course cautious there because we’ve got billions of dollars of deposits at really attractive rates and we don’t want to affect that. So, really funding only half of our loan growth has been, has taken us from high 80%s to real close to 100%. We’re closer than we’ve ever been on creating some deposit niches. I don’t think we’ll hit the mark with those this quarter, Peyton. But I think as we go to the end of the year, we’ll have some stuff ready to go next year that might take us 10% or 11% deposit growth. I think we can grow 10% or 11% out of our branch footprint without really affecting dramatically and that may take the – I think our deposit strategies and niches might take 10% to 12% maybe to 12% to 13%, 14% maybe. So we can close that gap a little. Of course, I think the question earlier about M&A and what would we be focused on, we’re definitely looking for deposit rich franchises in an M&A environment, either deposit rich in franchises or franchises that are in deposit rich markets where we can maybe get a little more aggressive and drive better deposit place. Does that answer your question?

Yes, no, that certainly helps. I guess maybe the other way to think about it is, as you’ve got $490 million of the non-covered – I mean of the pools, how – I mean could you sell those in current market conditions to create rather than just relying on run-off?

Actually Peyton, and we have looked at that. You know there is some – you know those are yielding 280-ish, 290. And so yes, our headline margin in the 3.70%, we pick up 6, 7, 8 basis points, moving out of those and moving into more of a traditional portfolio and given the growth that we’ve had and it might only take us a quarter or a quarter and a half to do that. It would be little painful for a quarter or two, but that’s an option and I think if the deposit niches, if the deposit ideas and the deposit niches or an M&A doesn’t materialize, that’s what we’d look at and we do track the pricing on the mortgage pools and we’re confident given the quality, no past dues, no charge-offs, the underwriting metrics that we could sell those and to just really come out whole.

And then what’s your projection for run-off on those over the next two to four quarter?

This quarter was a little slower, but we are – to us it still looks like it’s about 2.5 year average life on those remaining, $60 million – probably $60 million a quarter.

Okay, alright, great. And then anything lumpy on the expense side going forward over the next couple of quarters or you feel pretty good about where the run rate is?

We feel pretty good about the run rate. In fact, I’m going to Ed’s first comment about is – our goal is that’s exactly what our goal is. We obviously won’t be outperforming, but given a just one quarter out of three or four is not good enough. And so, getting the operation to be more reliable at these profitability levels has been our focus. I don’t think it’s going to be lumpy.

Okay, last question for me. I know we’re in the – only in the third week of the third quarter, but as you look at the mortgage business, how would you feel about it in this third quarter relative to how it performed a year ago when it was roughly flat versus the second quarter. Do you think you can keep that kind of comp or do you think it’s down a little this year?

Let’s see, I’m Hortman, give me just a second. You know, I’d say, I mean I like our profitability levels where they are right now, I think flat on that profitability level. Actually I think flat maybe up a tick, given the Ginnie Mae activity and given the – given where the pipeline is. Going into the third quarter, the pipeline is good. I mean we get – fourth quarter is going to be what it normally is. But I think third quarter will be a little more profitable. We’ll see some profitability increase in mortgage.

Okay, great. Thank you very much for taking my questions.

Alright. Thank you.

This concludes our question-and-answer session. I’d like to turn the conference back over Dennis Zember, for closing remarks.

Alright. Thank you again everybody that joined. If you have any questions or comments please feel free to call or email. Thank you and have a good week end.

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