Ameris Bancorp (ABCB) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ameris Bancorp Third 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 today’s event is being recorded. I would now like to turn the conference over to Dennis Zember, Chief Operating Officer. Please go ahead sir.

Thank you, Rocco, and thanks to all of you who 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 Ed Hortman, President and CEO; as well as Nicole Stokes, who’s Chief Financial Officer of Ameris Bank. Ed will make some opening comments about the quarter and some of the items were focused on and then I’ll spend some time going over a few of the details. Before we begin, I’ll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties. The actual results could vary materially. We list some of the factors that might cause results to differ in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements as a result of new information, early developments or otherwise, except as required by law. Also during the call, we will discuss certain non-GAAP financial measures in reference to the Company’s performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation. And with that, I’ll turn it over to Ed Hortman.

Thank you, Dennis, and good morning, everyone. I appreciate you taking the time this morning to join our third quarter earnings call. On the call today, we’ll discuss our earnings results and then provide some regulatory and M&A update comments. First, about our results. For the quarter, we’re reporting earnings of $0.54 per share and operating earnings of $0.63 per share, which excludes the onetime additional charge for the BSA look-back project as well as a small amount as a result of the Hurricane Irma impact. The additional charge we took for the BSA look-back $3.1 million after-tax and was really related to two items: the first was the time frame. It was greatly compressed given the opportunity we believe that existed for our bank once we have merged from the consent order. Secondly, the scope of the look-back was expanded, which, combined with our timeframe, made the look-back project a very expensive one. I would also add that these were expenses that were not unexpected, but were planned to expedite process. We could have invested significantly less and prolong the process, but we did not believe that was the appropriate course of action. What I can report today is that the look-back was completed in late summer as we expected and our full safety and soundness exam was completed a couple of weeks ago. While we’ve have not received the final report, I’m very pleased with the preliminary report and remain confident that we will be able to announce an M&A transaction prior to year-end. I’m also satisfied that we’ve delivered what we promised and now have an outstanding BSA/AML program that will support much larger bank than we are today. As I stated, we also incurred a small charge, about $100 – $250,000 after-tax that centered on the accommodations we’ve made for customers affected by Hurricane Irma. This basically included waived service charges and late fees as a result of closings due to the storm. Outside of these charges, we recorded net income of approximately $23.6 million or $0.63 per share compared to $21.7 million or $0.62 in the same quarter of 2016. Our operating rev share has continued to be impressive as they have in recent quarters. Operating return on assets in the quarter came in at 1.26% down from the 1.36% we reported in the same quarter in 2016. The decline in return on assets against the same period last year relates to mostly flat earnings for mortgage, just by approximately 15% higher average assets. Our return on tangible common equity was at 14.28% in the third quarter of 2017 compared to 17.31% for the same period last year and reflects the significantly higher capital levels that resulted from our capital raise in the first quarter of this year. The efficiency ratio in the third quarter was essentially flat at just over 61% compared to 60.95% last year. And we are continuing to press for better efficiency at sub-60% levels on a consistent basis. We continue to have impressive growth in earning assets with growth in core loans totaling $312.9 million or 24.3% annualized. For the year, we’ve grown core loans $803 million, which is a growth rate of 23% annualized. We expect the fourth quarter to be seasonally slower with lower warehouse and agricultural production, so I believe we’ll come in with annual growth rate right on top of where we initially projected at about 20%. Dennis will provide more details about the source of the growth, and the yields we’re posting on production shortly. But I can tell you, these items were as positive as we’ve seen in recent quarters. Another impressive factor in our quarter was an expanding margin, exclusive of accretion. In the current quarter, we’re reporting a net interest margin of 3.8%, which is higher against the most recently quarter in the year-ago period by about 3 basis points. Our earning asset yield increased by 5 basis points, while our total cost of deposits increased only 3 basis points. So we calculate deposit data against average bid price, which came around 15%, which is lower than it has been in recent quarters. One of the items that Dennis highlights about in the investor presentation is that compared to the same period in 2016, we have grown earning assets by $1.1 billion and still increased our margin by 3 basis points and we accomplished this while changing the earnings asset mix that have a lower risk profile. This is particularly noteworthy when you consider how aggressively we’re trying to grow deposits in the interest rate environment we’ve been operating in, where the spread between short and long-term rates keeps getting tighter and tighter. Non-interest income was strong during quarter but down slightly from a record period in the third quarter of 2016. For the quarter, we reported non-interest income totaling $27 million, compared to $28.9 million in the third quarter of last year. Although revenues were slightly lower, net income from the mortgage group increased albeit modestly, from $22.8 million to $3 million in the current quarter. As I mentioned earlier, our asset growth has materially outpaced our growth in mortgage net income and so the boost we get in our ROA for mortgage has moderated some during 2017. On the operating expense side, we’re reporting total expenses in the third quarter of $63.8 million, which includes the charge for the BSA look-back I discussed earlier. Excluding that amount, total operating expenses were $59 million, which is higher than $5.8 million when compared to the same quarter in 2016. Most of this increase relates to a few items including the addition of U.S. Premium Finance which added $3.6 million in the current quarter. Incremental BSA expenses that includes new systems and additional staffing totaling $1 million, and higher expenses in the mortgage group totaling $700,000 in the third quarter compared to last year. Higher expenses in our mortgage group and U.S. Premium Finance was due to both groups being very successful in hiring new sales officers, which included some guaranteed commissions and signing bonuses that hit our profitability this quarter but sets us up for better growth in 2018 that would be more commensurate with a phase of growth we expect to provide next year. As I’ve said previously, we’ve had continuing M&A conversations while working to improve our BSA/AML systems. While there remains a difference between [indiscernible] on many opportunities, there are several deals were working on that have the kind of economics our shareholders expect: solid EPS accretion and minimal-to-no book value dilution. We will continue to be disciplined in our approach, but believe there remain opportunities in the short-term for Ameris Bank in this area. So Dennis, I’ll stop there and ask you to cover some more of the details, please.

All right, I’ll start with a summary of our loan growth. For the quarter, we grew loans by about $312 million and it was diversified just – as it has been in the past quarters, both across the product side and where we’re getting the growth. CRE in the quarter represented about 29% of our growth, while our C&I oriented lines represented about 50%. Inside the C&I bucket, we include municipal, which grew about $30 million, mortgage warehouse, which grew about $37 million and Premium Finance, which grew about $34 million. Residential lending accounted for about 14% of our growth, and consumer was typically small at 5% to 6%. When you look at the lines of business that we operate versus the core bank, both are about 50-50. So the 23% or 24% growth rate that Ed was saying, we’re getting about half of that growth from the core bank and about half of the growth from the specialty lines of business that we operate, which we’re pretty pleased with, and we think that that’s sustainable for the rest of this year, and really going into next year. Ed – well, Ed briefly mentioned deposit growth, which has been a real focus for us this year. Our deposit balances are seasonal, like the rest of the industry, and when you compare it to a year ago, we’re up just over 11%, which I am pleased with. The fourth quarter is seasonally our strongest quarter in deposit growth, and I really believe we’re going to finish the year strong on deposit growth. Combining this with what we think is going to be a slower quarter on loan growth, I think we’ll be able to provide a little relief for the loan-to-deposit ratio, which seems to have moved up slowly during the year. Ed mentioned the margin, which we’re also pleased with. The real power behind the margin moving higher is better yields on loan production, which you can see on Page 8 of the investor presentation. For the quarter, loan production yield came in at 4.72% compared to a year ago at 4.16%. Earlier this week, I mentioned to our board that the margin moving higher in the quarter was really not a naturally occurring event, but that our bankers are working hard on both sides of the balance sheet, and our result this quarter was outstanding. I’m really proud of what our bankers did in the third quarter of this year. Non-interest income did come in – came in a little this quarter against a year ago, which is driven by two items. First, on service charges, we’re being a little more cautious than we have in the past about our level of deposit fees as we approach $10 billion. When I look at the level of income from the deposit portfolio, we’re really at the industry average, and I don’t believe tweaking this any higher is a smart thing to do and I – or a good source of income bottom line growth. Some of this decline in the quarter resulted from refunds associated with customer accommodations that Ed mentioned mostly on 2018 charges and overdrafts that we made for Hurricane Irma victims, and the other portion relates to just national attrition and lower balance accounts. On mortgage, we were more aggressive recruiting and growing our business than we have been, really, in the first half of the year, and we landed 15 new bankers in several key markets, including Jacksonville, Charleston and Greenville. And I don’t want to repeat Ed’s earlier comments, but mortgage has been a reliable source of about 15 basis points or so in the ROA, and these bankers operating in these really solid markets will help us grow the bottom line at a pace that’s more in line with where we think the balance sheet growth is going to come in. And while revenues, if you look at just non-interest income, revenues were down against the same quarter a year ago, but we are higher in net income by about 6% for the quarter and about 10% for the year, which we are pleased with, given how tough this business has been with refi going away, and rates up generally against last year, but pretty unreliable. Ed already mentioned and discussed operating expenses, so I won’t provide too much color, but I will say that the charge we took from BSA this quarter wholly relates to the look-back project and doesn’t include any recurring charges. So said a different way, none of that amount will be in future quarters. And given that the look-back in our exam is complete, we don’t expect any additional one-time charges or – and we don’t expect any increases in our BSA or in run-rate this quarter, had a full run-rate owned from BSA. With that, I will turn it back to Rocco for any questions.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And today’s first question comes from Brady Gailey of KBW. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning, Brady.

You all really didn’t take much of a charge related to Hurricane Irma in the third quarter. I know some of your peers that have been exposed in hurricanes have kind of set aside a more notable amount of provisioning. Is that something that you all felt just wasn’t needed? Or do you think that that’s something that we may see in the fourth quarter?

Brady, I don’t think you’ll see that in the fourth quarter. I guess, one of the things that surprised us, and pleasantly, at the end of the day, it was pleasant. Almost every one of our offices were impacted by that storm. It was such a huge storm, and so it really tested some of our processes for disaster recovery. But at the end of the day, the best analogy I can give you is out of all of our employees, our 1,450 – 1,500 employees, we asked the employees to report any personal damage to their homes. We had two. Now I know there were at least one other. My house was included. I didn’t report. So we had three out – so the damage, while we were closed a couple of days in most places and up to four, five days in a couple of places, the damage that we saw that impacted our people and our customers was more limited than what we expected.

All right, great. That’s good to hear. And then as hopefully we get close to wrapping up this BSA issue, it sounds like you all are close to pulling the trigger on an M&A deal once that happens. Can you just remind us, when it comes to M&A, what’s the size range that you prefer? What’s the geography and what type of bank would you like to acquire?

Brady, I guess, I would start with challenges that I’m really proud of our people. Our BSA/AML culture is not just the BSA department. It’s from the front-line staff all the way to the board, and the seriousness and the teamwork that they displayed to get us through this project was remarkable, and I’m very thankful for that. And in our minds, it is behind us. We’re very pleased with where our program stands, and as I said, very pleased with the preliminary results of the examination. From an M&A perspective, I did make those comments that we’re pretty close. Obviously, we’d like to have a bank that provides some deposits, but that’s not necessarily the top priority. In-market opportunities would be preferrable because we have call saves and could increase our market share, and increasing market share gives you depth and advantages within a particular market. So the larger markets – in-market is where we would focus. And the size has not changed from what we’ve got it to before from $500 million to $2 billion or so.

All right, great. That’s really helpful. And then one last one for Dennis. I noticed the tax rate was a little lower than some have expected, around 29%. What do you think you did for forward run rate for taxes?

Nicole? Thank goodness Nicole is in the room. The adjustment this quarter was a little bit on restricted stock. Going forward, we’re still right at the 32% that we’ve typically been at.

Okay, great. Thanks, guys.

And our next question today comes from Tyler Stafford of Stephens. Please go ahead.

Hey, good morning, guys.

Good morning.

Good morning, Tyler.

I wanted to start on expenses, Dennis, and maybe it’s for you then. Just trying to get a better understanding on the expense run-rate from here. Obviously, there’s a lot of noise with the compliance resolution and then Irma. If you kind of backed those two things out, you’d get around $58.5 million. Obviously, you guys hired a lot during the quarter as well. That should pressure that, but then 4Q, I would think, would be seasonally lower as well from lower mortgage comp. Can you just help us out in terms of the puts and takes on that and the trajectory of the expenses from here?

Yes. Second and third quarter, one thing that really that materially just affects it, excuse me, is incentive comps. Second and third quarter’s our biggest accrual quarters for incentive comp. And so obviously, going into fourth quarter, we expect – generally, production’s lower. Commercial production is lower and then commissions production, SBA mortgage, so forth, is lower. So I’d expect on the commissions side for us to be probably maybe $0.5 million lighter than where we were this quarter, and then maybe a couple $100,000 lighter on incentive comp. So that I would expect – I think the $58.5 million is a clean third quarter number. And again, I don’t expect any growth – we don’t expect any growth in the BSA group or in the compliance group, which we have been building all year, but we were at a full run-rate on that in the third quarter. So I don’t expect that to grow, and I’d expect for there to be a little falloff in – maybe $600,000, $700,000 or so in incentive comp and commission.

Okay, got it. Very helpful. Maybe just on mortgage, you mentioned in the press release the 15 hires, producer hires that you made this quarter, how will that impact your expectations for production, going forward? And then any comment about the Ginnie Mae issuances and when we might see an uptick in the gain-on-sale margins, and kind of what’s your updated thinking on those margins?

All right. The 15 producers, and I don’t – I’m not – I don’t know each of them, in particular, but I do know four, five – what four or five do. I would tell you, and given the kind of producers that Robert hires, it’s probably $250 million to $300 million a year additional production that you – we’d expect to see next year. We generally put about 1% on production to the bottom line. I know several of them are government producers, and so their profitability may be even a little better than that. So I think just those 15 producers alone for what they’ll do next year, I think, is going to be meaningful to the bottom line. We wanted – we really hope that this wasn’t going to be the first quarter that we got some real power behind the Ginnie Mae issuances, but we ended up only doing $15 million of Ginnie Mae securities. We’ve got it a little better than 15 – excuse me, 50 basis points on those, so it really – it’s in the numbers, but it was probably less than $100,000 of impact. We’ll probably move that up to, say, $40 million or $50 million this quarter, as we get our feet up under us. And then I think, next year, you’d see us do almost all of our production – government production in the Ginnie Mae securities. But for this year, we just didn’t get the juice from that, that we thought we would.

Got it, okay.

It’s still running, Tyler, about 50 basis points, which is on the low end. We do about $150 million a quarter of government production. So I mean, it could be – that could be very meaningful for next year.

Okay. That clears that up. And then just a clarification question for me, I just want to make sure I understood you earlier, Dennis. You talked about the loan growth that you’re seeing this year. It’s still tracking at about 20%. Did I hear you correctly you say that – roughly, that pace is going to be your expectation for growth next year as well?

Ed and I talked about that five minutes before we dialed in here, you know, what to say. Obviously, with the balances, we’ll finish the year with much higher balances than where we started. I feel – just like I said last year, we still got a lot of room on Premium Finance. We’ve got room on mortgage warehouse, municipal, where, I mean, it’s just as good and the yields are still really solid. The bank is producing really solid, and we have – I think, we have one or two fewer producers, actually, on the bank side now than at the beginning of the year, so we’ve got some room to staff up there even. I don’t – I’m not going to say more than 20%, but I would say 17% to 20% for next year, and again, that’s not pushing too hard at the bank level. I think, for our core bank, which is mostly centered around CRE and local – some local C&I stuff – I think that we probably need 12%, 13% – 11%, 12%, 13% growth out of them, and then the rest of that would come from growing these kind of niche lines of business that really are not at critical mass yet.

Okay, very helpful. Thanks, guys. Appreciate it.

All right.

And the next question comes from Jennifer Demba of SunTrust. Please go ahead.

Thank you. Good morning.

Good morning.

Have you’ve been able to capitalize on the disruption opportunities in the Carolinas with all the acquisitions that have or are going on right now? And what’s your hiring expectations are for next year?

Yes – the answer is yes. I mean, one of the, I would say, our new Chief Risk Officer, is a result of some of that disruption. So from that standpoint, I’d say, yes. You’re asking really more about on the production side. And one thing I would tell you is South Carolina’s, I mean, one of our most reliable sources of loan production, but they – it has been – and it’s generally tighter up there, loan yields and spreads are. But if you look at the bank yields, again, I’d reference kind of the investor presentation, that’s moving from 4.16% last year to 4.72% for this quarter. I think some of that is probably a little less price competition, and especially on the CRE side. And I’m not saying that it’s where we’d want it to be. But given that there’s some less – that there’s fewer competitors, yes, I’d definitely say we’re seeing probably more benefit, Jennifer, in the yields as we – as opposed to the production levels. As far as hiring and – this is the second question. As far as hiring, again, I said we have, I think, one or two fewer commercial bankers now than at the beginning of the year, and that’s not on purpose. It’s just – at South Carolina, we’d be more than happy to hire somebody that could play our offense in really any of those markets: Greenville, Charleston and Columbia, primarily. But even the Bluffton, Hilton Head, Beaufort area. So yes, we’d be more than happy to, and I would tell you that our people are always on the prowl for somebody that we’re pretty sure can run our offense.

Great, thanks.

And our next question comes from Casey Whitman of Sandler O’Neill. Please go ahead.

Good morning.

Good morning.

Good morning.

This is Jeff Kitsis, on for Casey, this morning. You mentioned reaching critical mass and your specialty lines of business. The Premium Finance Division currently has 62 full-time employees. Can you give us a good, for example, target on headcount and also the timeframe to make those hires? And then also, how should we be thinking about the associated expenses?

Yes. We have 62 in Premium Finance, and of that 62, there’s 13 or 14 producers and the rest are back office support. I’ll tell you, the back office support, and we’ve added – I think we added another credit person in Premium Finance. But outside of that, we really don’t need – that support structure could carry us to $1 billion of outstanding. I think we ended the quarter just over 500, right? 500. So I think most of the hiring that we would do, we probably want to take 13 or 14 producers to 20 or 21 producers, and I think we’d probably – one or two a quarter for the foreseeable future.

Thank you. And how should we be thinking about expense growth related to those hires going forward?

I don’t want to say what we pay them or how we pay them, but I would say net – on a net basis, it would be – on a net basis, I think, well, I don’t – let me say it this way. I don’t believe – if we’re going to finish the year with, say, $500 million to $550 million outstanding in Premium Finance, I think, what we’d be looking for is 15% to 20% growth in that next year, given how successful we’ve been moving the balances there. I don’t think that’s going to change, and I don’t believe our return on assets would change. In fact, I’m confident that our return on assets won’t change. So – and again, I’m not deferring on your – maybe I’d go offline with you about that. But I think we can move the balances from, say, $500 million to $550 million, all the way up to, call it, $600 million to $650 million, and still be posting kind of a pretax return on assets about where it is right now.

Okay, thank you. Thank you for taking my questions.

All right.

And our next question comes from Christopher Marinac of FIG Partners. Please go ahead.

Thanks. Good morning. Ed and Dennis, was there a reason that all of the compliance charge came this quarter versus spreading it out in earlier parts of the year? I didn’t know if there was a background to why it all came in one quarter?

Yes, Chris, we – our initial charge that we took in, I guess, December of last year, yes, was $5.650 million, and it was not until – it really wasn’t until the very first part of the third quarter that we tweaked the scope on the – fully tweaked the scope on the BSA, on the look-back, and when we did that, it was – it costs a good bit more. It wasn’t timing as much as – it wasn’t planned timing as much as it was just when we got the final scope on the look-back, and it was greater and way more intense than what we had initially planned. Does that answer your question?

Let me clarify that just – Chris, let me clarify that just a bit. You understand, we did not control the scope of the look-back. That was FDIC-defined with the third-party outside vendor. We would not – we did not get to participate in that. We only got to use their results and the work that was done. So it was a little bit later than – we got it a little bit later than we expected, and it was a little more detailed than we expected. And so we had to put – we had a choice to make: to either spend more and get it done within the initial time frame that we were thinking or delay it, and we chose to spend more and get it done quicker.

Got it. Makes sense. That’s helpful. I appreciate that. Next question for me just goes back to the credit provision. And as we think about going forward, how much of incremental growth of the loan portfolio ultimately should get funded in new reserves? I know it balances quarter-to-quarter based on conditions, but just curious how we should think about that the next year or two?

I need to do a little math on that, and I’m always walking the fine line between Ed and the SEC. But I mean, this quarter, when we grow in municipal and equipments – I mean, excuse me, Premium Finance, and even really honestly some of our residential lending, we just – I cannot really justify anything more than on some of those 5 basis points or 10 basis points to residentials around 35. So the portion of that growth just looks underfunded in the loan-loss provision. But again, it’s cash-secured or backed by municipality. I think you’ll see us, over time, Chris, you’re going to see us doing more traditional CRE lending, and honestly, probably construction lending. And those are going to have more the kind of reserve requirements in provisioning that we all have come to expect. I think you’d probably see a little more – that’d be a little bigger as a percentage next year than what it’s been this year.

CISA will help us – longer-term, CISA will help us – actually, will help me. I’d love to see more reserves because we all know credit is really good right now. And so the methodology, it just doesn’t allow us to build a lot of reserves there, but…

Yes. You’re going to see some more reserve built, and you’re going to see cost – over time, you’re still going to see more of the credit cost moving from operating expense side up to the provision this year. This year, we’ll probably have – without looking at it, we’ll probably have somewhere $11 million to $12 million in total credit cost, and that is going to keep moving higher by a couple million dollars, I think, $1 million or so, just given the size of the portfolio.

Got it, okay. Sounds great. Thank you for the background here is very, very helpful.

All right.

Ladies and gentlemen, this concludes our question-and-answer session. I like to turn the conference back over to the management team for any closing remarks.

All right. Thank you, again, for all of you that joined. If you have any questions or comments, please feel free to call me or Ed or Nicole, call or e-mail, and we’ll be glad to get back to you as fast as we can. All right. Thanks, and have a good day.

And thank you, sir. Today’s conference has now concluded, and we thank you, all, for tuning in to today’s presentation. You may now disconnect your lines and have a wonderful day.