Ameris Bancorp
Q3 2019 Earnings Call Transcript

Published: 18 Oct 2019

[Operator:]

Good morning and welcome to the Ameris Bancorp Third Quarter 2019 Financial Results Conference Call. I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead.

[Nicole Stokes:]

Thank you, Ally. 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 general comments and then I will discuss the details of our financial results before we open up for Q&A.

[Palmer Proctor:]

Thank you, Nicole, and good morning to everyone who's joined our call today. I wanted to share a few highlights about the quarter and why we're excited about the rest of 2019. And then the opportunities we see coming into 2020. For the quarter, we earned $68.5 million or $0.98 per diluted share on an adjusted basis, which is up over 8% compared to the third quarter of last year. This represents a 1.57% return on average assets and 18.95% return on tangible equity. Our efficiency ratio increased to just over 57%, which was expected as the cost saves from the Fidelity acquisition aren't fully realized yet, and we're still running two core systems until November of this year with the conversion. For the year-to-date period, we earned $156.3 million or $2.85 per diluted share on an adjusted basis, which is actually up 19% over 2018 results, and this represents our year-to-date return on assets of 1.55%, and 7% improvement from the same period last year. We've been very pleased with our organic growth on both the loan and the deposit side. Our loan to deposit ratio has been very stable at 94%; and if you exclude the Fidelity acquisition, our loans actually grew over $283 million or almost 13% annualized during the third quarter alone. So that leaves our year to date annualized loan growth at 13.75% for the year, and our annualized non-interest-bearing deposit growth at 13.58% for the year, which is pretty impressive. Our loan production in the Banking segment was up 151% this quarter over the third quarter of last year. Yields of course, were down on the new production as we would all expect with the recent Fed cuts, but the pipelines are encouraging, they are strong as we look into the fourth quarter. So, we feel very encouraged about that.

[Nicole Stokes:]

Great, thank you, Palmer. As you mentioned, Palmer, today, we're reporting adjusted earnings of $68.5 million or $0.98 per share for the third quarter, and that's compared to $43.3 million or $0.91 for the third quarter of last year. These adjusted results primarily exclude about $65 million of merger charges, a $4 million gain on a BOLI proceeds, about $1 million recovery of MSR impairment from prior quarters, and $889,000 of loss on branch sale building - or branch - the sale of branch building. Including these items, we're reporting total GAAP earnings of about $21.4 million or $0.31 per share. The $0.98 per share adjusted EPS represents an 8.5% increase over the $0.91 we earned in the third quarter last year, and the income - the $68 million of income represents a 58% increase over the third quarter of 2018 adjusted earnings. Our adjusted return on assets in the second quarter was 1.57%, which was an increase from the 1.56% reported last quarter and the 1.53% reported in the third quarter of last year. For the year-to-date period, our adjusted ROA is 1.55% compared to 1.46% last year-to-date. And as previously stated, we continue to aim for an ROA between 1.55% and 1.65% going forward. Our adjusted return on tangible common equity was 18.95% in the third quarter compared to 18.79% last quarter and 20.50% in the third quarter of last year. For the year-to-date period, our 2019 adjusted return on tangible common equity is 18.87% compared to 18.47% last year.

[Palmer Proctor:]

Thank you, Nicole. I'd like to conclude with this comment. As you know, so much of life and opportunity it's about timing and I can tell you that our timing for bringing everything together here at Ameris whether it'd be our teammates, our Board, our systems or the overall integration, it couldn't be better as we position the bank to take advantage of the tremendous opportunity we have in front of us in the markets in which we operate and we're definitely in the right place at the right time and more importantly, we have the right teammates to make it happen. So, with that, I'd like to thank everyone again for listening in for our third quarter earnings results as we look forward to the rest of 2019 and to what 2020 hold for us. I'll turn it back over now to Ally for any questions from the Group.

[Operator:]

The first question comes from Casey Whitman with Sandler O'Neill.

[Casey Whitman:]

Just a few questions with regards to loan growth. Just more broadly, I was wondering if you could just talk to us about the organic loan growth at the bank segment and production this quarter. Is a lot of that being driven by the Atlanta market, or are you seeing good growth throughout your markets? I guess, my question will just be what markets are growing more than others or are there more opportunities in particular markets for you guys.

[Palmer Proctor:]

Right now, where we're seeing most of the loan growth, the predominant loan growth this last quarter and the activity in terms of production is coming out of Atlanta and then parts of our Florida market in that order.

[Casey Whitman:]

And then also you referenced the sale of a I think a Corporate Finance Group portfolio in the quarter, can you just give us an idea of the timing of that sale, and kind of the decision there?

[Nicole Stokes:]

Sure, Casey, that was the Corporate Finance division that we got with the Hamilton acquisition last year. And from a credit and a risk, we really - we're not big fans of that portfolio. So that had been planned for a while to dispose of that and/or to sell those loans. They had been moved to held for sale at the end - during the second quarter and then we closed on that during the third quarter.

[Casey Whitman:]

And lastly on the loan growth, would just be, the indirect auto, I guess how is the runoff been trending in that and can you just remind us of what we can expect the run-off to be per quarter in that book?

[Nicole Stokes:]

Sure. So, when we did the acquisition of Fidelity, it was about $1.2 billion, $1.3 billion. Today or at the end of September, it was down to $1.05 billion and we - the run-off amount is about $130 million to $150 million a quarter.

[Palmer Proctor:]

And it's paying off just as we had - as it always has. That's one thing about that line of business is, it is very predictable in terms of cash flow and it continues to perform that way, and asset quality remains pristine.

[Casey Whitman:]

I'll just ask one more and let somebody else jump on. Just with regard to expenses, you mentioned some accelerated cost saves in your prepared remarks. Can you just sort of remind us or walk us through how much more on cost savings you have to come out of line between the fourth quarter and first quarter between the bank and the mortgage groups? And just sort of help us out with how we should think about the timing of all those cost saves heading?

[Nicole Stokes:]

Sure, so we had anticipated about 20% of those coming into the third quarter, coming out of the third quarter, I should say. And then about 30% coming out in the - another 30% coming out in the fourth quarter, and then the rest of it coming out in 2020. So we have our data conversion set for the first weekend of November, and so we still have what I call kind of some of that that overhang of expenses from running two systems and so that's really the pick-up in the fourth quarter over the third quarter is that we will have lot of those administrative costs gone and the duplicate systems by the end of November. So, we were a little bit ahead of our cost saves. We had projected 20%, we're closer to 25% to 30%. And then we anticipate another 20% to 25% in the third quarter which is or sorry in the fourth quarter, which is similar to what we had said before, it's just, we picked up 5% more in the third quarter and then the rest will be coming out in the first quarter.

[Operator:]

Our next question comes from Jennifer Demba with SunTrust.

[Jennifer Demba:]

Question, will any of this mortgage production activity bleed into fourth quarter?

[Nicole Stokes:]

Jennifer, the piece that might bleed. So we have - it's the bundling and the selling of that, but we have those market fair value. So we don't anticipate - now there could still be, I mean, I don't think all of the volume just shut off September 30. So, there will be some overhang some - like a little bit, but we really think the fourth quarter is going to come back to more normal volumes. The biggest impact in the fourth quarter is going to be bundling and selling of those loans, but there shouldn't be an income statement impact for that.

[Palmer Proctor:]

As Nicole said to Jennifer, the momentum is certainly there. And so that will carry us into the fourth quarter, but it will be at a much more normalized rate than what we've experienced this quarter.

[Jennifer Demba:]

Nicole, do you guys have a preliminary estimate for your loan loss reserve adjustment for CECL?

[Nicole Stokes:]

That's a great question - and Jennifer, and what we have not given out guidance in the past with a specific number with the Fidelity acquisition coming on. We have run that third quarter run, and we're still analyzing that. I think there will be some additional guidance in the 10-Q about that. What we have said and we'll continue to say even with knowing that it's only October 18 and to get all of the Fidelity data from two systems into the CECL model is that we still are not surprised and that what the model is showing is still in line with our projection, so we are certainly not surprised with the results, and I think there will be more guidance in our third quarter queue that we file with the SEC.

[Jennifer Demba:]

One last question, any hiring done during the third quarter, you mentioned disruption opportunities, just give some more color there.

[Palmer Proctor:]

Well, you know for us fortunately, just given our position in the market. The disruption, we're able to take advantage of with our existing teammates without having to really bring in a lot of new folks. But that being said, we are constantly in front of a lot of folks right now. I think, we'll start seeing more movement there as we move into the fourth quarter. We have made a few new hires - couple then in Florida in particular but that we've got a very active pipeline to answer your question.

[Operator:]

Our next question comes from Tyler Stafford with Stephens.

[Tyler Stafford:]

I wanted to start on the mortgage business and you mentioned a couple of times expecting fourth quarter to return to a more normalized level. So just to be clear, are you, are you kind of saying, go forward is roughly $5 billion. But with the normal kind of bell curve seasonality in the summer months so then we should see $5 billion roughly annually with fourth quarter kind of dropping off seasonally.

[Nicole Stokes:]

That's right. And so the third quarter results were about 43% elevated over. If you look at the historical third quarter Ameris and the third quarter Fidelity, you put those together, we're elevated - were elevated about 60% and we think about 43% of that is related to the kind of the low rate environment, we saw a little bump in our repurchase. I mean our refinance as we proposed to purchase and so fourth quarter we're expecting to go back down to, if you took the Fidelity fourth quarter run rate of September and the Ameris fourth quarter run rate, historically kind of go back to that plus maybe a 10% to 15% bump just because of the year-over-year growth.

[Tyler Stafford:]

And then Nicole, do you have what the purchase first refi mix was in the third quarter?

[Nicole Stokes:]

I do. So we typically both run about 85%. Well actually Fidelity was a little bit higher. Ameris ran about 85% purchase and 15% refi and Fidelity ran about 89% purchase. And this quarter, it dropped to 70% -- about 71%, 72% purchase.

[Tyler Stafford:]

On a combined basis?

[Nicole Stokes:]

On a combined basis. That's right.

[Tyler Stafford:]

And is this kind of 2.67% gain on sale margin that you saw in the third quarter? Is that what you'd expect going forward as a normalized level?

[Nicole Stokes:]

I think it will normalize over time. So that in 2020, it will get closer back to a normal a little bit a higher closer to the Ameris gain on sale number. I don't think that'll be instantaneous in the fourth quarter.

[Tyler Stafford:]

And then - the mortgage business had I think $1.3 million servicing right recovery. I guess how much servicing income did you realize this quarter and then any thoughts on what you plan to do with that servicing portfolio?

[Nicole Stokes:]

The servicing portfolio at this point, we've looked at several different functions as opportunities to do that. And as of right now, the plan is to retain that and to continue to service that. Through today and Tyler that number growing in front of me I'll have to get a view on that.

[Tyler Stafford:]

That’s okay, that’s fine.

[Nicole Stokes:]

Just a little bit separately.

[Tyler Stafford:]

That's fine. And I guess lastly just on kind of mortgage-related you mentioned the held for sale balance is coming back down. Is there a normalized level of HFS that you plan to keep now with Fidelity in the fold?

[Nicole Stokes:]

Yes, we think that that normalized level is somewhere between 400 and 450 with the normalized number combined. And just to kind of it’s a great, great - it's not really necessarily your question, but I mean, it's a great time for me to talk about that. One of the things with our mortgage companies coming together going through the integration. One thing that they really focused on with continuing to service the customer so, they didn't slow production. They were able to continue and the piece that did kind of slowed down with that backroom of packaging and getting them sold. So that's really why that number grew, but again we expect that to go down, probably a more normalized numbers between 4 and 4.50.

[Operator:]

Our next question comes from David Feaster with Raymond James.

[David Feaster:]

So I'd like to just start on the margin. So I guess, looking at the fourth quarter with the held for sale wind down that you talked about being about 4 basis point help. And then the indirect runoff offset by a September cut. It sounds like you think you can hold your core NIM fairly steady here?

[Nicole Stokes:]

So well when you think about that September cut that really was even though it was a third quarter event. We don't have the really impact of that in the third quarter because it was so late in the third quarter and then if we had another cut. So and that we're still guiding that we could have you know 4 basis points, 4 to 5 basis points of margin compression in the fourth quarter and then - you know could potentially be another cut.

[David Feaster:]

And then do you have any expectation, could you just give us some thoughts on your accretion expectations going forward?

[Nicole Stokes:]

Sure so, the only guidance that we've given for 2019 because we're being cautious because of seasonal impact for next year. So and you'll see that our accretion income went up this quarter by about $1 million, $1.1 million into that that's about the normal run rate for the fourth quarter as well.

[David Feaster:]

And then just following up on the loan origination strength that you're seeing in Atlanta. Obviously there is a lot of disruption there as you've mentioned. Could you just talk about, we've talked before about you want to get more in that middle market there, which is a huge opportunity. How is that going, what success have you seen in the middle market in Atlanta?

[Palmer Proctor:]

Yes Tyler, we're starting to see success there. Obviously there is a lead time on those relationships and a lot of them, been locked down for years. But we're starting to see some movement there and on the lower middle market end and that's where we're really focused. And so, I think as we move into especially into 2020 that's, where we'll start seeing more of that lift. But the migration of those relationships certainly - there is a lead time with that, but we're encouraged by the, not just the opportunities but the execution on that especially in the Atlanta market.

[David Feaster:]

And then I guess just high level. Could you just talk about what you're seeing in the market. Anecdotally, we've heard that pricing competition increased in that - as underwriting standards are loosening with less recourse and lower levels of leverage. Are you seeing a similar phenomenon and are there any segments or markets where you're seeing that more?

[Palmer Proctor:]

No, I’ll tell you competition is fierce in terms of pricing, but I will tell you that all the banks that we run into in terms of competition. Nobody is compromising on the asset quality itself. Structures are getting a little bit looser in terms of duration and pricing, but there aren't any deals out there that we're seeing other banks do that just don't make sense, which is encouraging for us as an industry. That being said, there is still a lot of movement out there and in terms of the different sectors. We have certainly pulled back a little bit I just threw a discipline and a caution on a lot of our commercial construction. But that's more just us position ourselves in terms of the capital as a percentage of some of these construction loans, not because we're seeing any cracks or inherent cracks in any sectors out there. I mean if you look at absorption, especially on the multifamily side and on the single-family side, it's all still very strong. There is actually a lack of inventory in a lot of our metro markets. So, we still feel very encouraged by what we're seeing and right now do not see any or anticipate any cracks in the near future.

[Operator:]

Our next question comes from Woody Lay with KBW.

[Woody Lay:]

So it's good to see the interest bearing deposit costs come down. I was just wondering what impact Fidelity had on that number and sort of what impact was just legacy Ameris cost of deposit?

[Nicole Stokes:]

That's a great question. So the Fidelity impact was included in that their deposit costs were about 25 basis points less than ours. And then also we dropped deposits across the board. So it's a little bit hard to give an exact number, because Fidelity, we drop their rates with the July cut and the Ameris rate with the July cut as well. So it would be absolutely blended of both items.

[Woody Lay:]

And I think last quarter you said you were assuming a 50% deposit beta in your margin guidance. Is that still holding through?

[Nicole Stokes:]

Yes.

[Operator:]

Our next question comes from Christopher Marinac with Janney Montgomery.

[Christopher Marinac:]

Palmer in the call I want to drill back down on the competition comment a few minutes ago. How often do you have price concessions either on deposits or loans? And as you move relationships in the future is that going to be part of the equation or something that you can avoid?

[Palmer Proctor:]

Well - we certainly try to avoid and I would tell you we have less concessions on the deposit side and more concessions on the loan side. So as a result because we look at it from a relationship standpoint Chris and so we are. We do feel the pressure more on the loan side, then people trying to beat us down on the deposit side. So we look at it holistically, but that being said, I think the important thing is to make sure we aren't looking at just transactions and looking at the entire relationship which is how the bankers are. We're getting flows and some of our deals wherever we can which just hard to believe. I didn't think we'd be saying that again, but we are getting flows in people now borrowers in particular are more sensitive that and aware of that. But we have been successful in implementing some of the flows, especially if we're being competitive on the rate.

[Christopher Marinac:]

Over time, is there a percentage of the portfolio that you think will have flows I know it's kind of an evolution as you reset?

[Palmer Proctor:]

I would love for a higher percentage to have flows, but right now I think what we're able. We’re more successful in obtaining the flows as obviously on the residential construction lending. On the commercial side, as we're trying to take business and take more market share and having to be more competitive that's where we're having less success in terms of the flows. But we're having more success and where you'll see it is on the liability side in terms of bringing over that core funding. So if you look at the balance there in terms of the NIM pressure while we may be given a little bit of a yield up on the loan side or hopefully garnering more on the local funding side to offset that.

[Christopher Marinac:]

And the last question this has to do with the systems conversion. Once that's behind you, to what extent are there new products and sales that you can implement other things kind of in the wings that you'll see next year?

[Palmer Proctor:]

Well, the exciting part of that is more looking at the efficiency. We’re big user of sales force then seen of. And fortunately both companies legacy, Fidelity and Ameris utilize that technology. And you will see us leveraging more and more of that, not only in specific areas throughout the bank obviously new online account openings. We're focused on streamlining that process with lot of what we're going to be focused on it is tweaking the current technology we have and just making it more efficient in the process more efficient. And banks today still have way too much bureaucracy in terms of execution and the fun thing about being $17 billion, $18 billion bank is being able to make small tweaks here and there that can be meaningful in the overall scheme of things. Whether it's just reduction of paper or just efficiency through less printer use just a lot of simple technologies there that we're zeroing in now. And so our Chief Innovation Officer which is our CIO obviously is - that's his sole mission right now.

[Operator:]

This concludes our question-and-answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.