Ameris Bancorp (ABCB) Q1 2015 Earnings Report, Transcript and Summary

Good day and welcome to the Ameris Bancorp First Quarter 2015 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Edwin W. Hortman, Jr., President and Chief Executive Officer. Please go ahead.

Catherine, this is Dennis. Actually, I will take the first part. Thank you, Catherine and thanks for everybody – thanks everybody for joining us today. During the call, we will be referencing to slides and press release that are available in the 8-K we filed this morning. Edwin Hortman, Jr., President and CEO and myself, will be the presenters and available after our prepared comments to answer any specific questions you might have. Before we begin, I will 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 these 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 any forward-looking statements as a result of new information, early developments or otherwise, acceptance maybe required by the law. During the call, we will discuss certain non-GAAP financial measures in reference to the company’s performance. You might see a reconciliation of these measures and our GAAP financial measures in the appendix to our presentation and on our press release financial tables. And now, I will turn it over to Ed Hortman.

Thank you, Dennis and good morning everyone. I appreciate you joining us this morning on our first quarter earnings call. I am going to give you some high level comments on the quarter and a brief update on our pending acquisitions and then I will ask Dennis to come back and review the details of our operating results. First, on the acquisition front, we announced two materially accretive acquisitions early in the quarter and a supporting capital raised. The acquisition of Merchants & Southern Banks in Gainesville, Florida has received regulatory approval from the Fed and the FDIC and we anticipate closing that transaction on May 22 with the September conversion date. The proposed acquisition of 18 branches from Bank of America is progressing as planned. We have forecasted June 12 closing and conversion on that transaction and we don’t anticipate any problem at this point meeting that deadline. One of the interesting comments about that transaction was the forecast deposit runoff that we had, was 10% along with the related fee income. And as of last Friday, we understand that less than one half of 1% of runoff in the deposits that we are acquiring. So, obviously, we are pleased with that and we expect to come in at or below our original forecast. We are still very excited about the incremental impact of the both of these deals on our operations and we will give you more color about some of those assumptions later in our remarks. Now, on to our first quarter results, we had a good quarter with several successes to speak of, but we missed our expectations in a couple of areas and we will talk about those. Successes for the quarter included annualized loan growth of about 12% in generally what’s our slowest quarter for the year. We have posted strong results from our mortgage and SBA divisions in both revenue and net income. We had over $128 million of growth in checking accounts compared to the fourth quarter of 2014, which pushes checking accounts to total deposits to almost 28%. And lastly, pipelines of sales activity in the bank and in every line of business is trending very positive, which I believe is an indication of stronger local economies. Although we had a great quarter of production, our pay-downs and payoffs in the first half of the quarter were very high and the production does not translate into significant growth. End of period balances were up slightly, but average loan balances were down from the last quarter. And that’s because almost all of our growth in loans was in the last two weeks to three weeks of the quarter. And so then the positive news was that our beginning balances for the second quarter are higher. We have much stronger pipelines and we are very confident that the second quarter revenues will rebound solidly and will continue for the reminder of the year. Core operating expenses over the same period a year ago showed a 23% increase. If you look at our growth rate in core operating expenses over the past few years, it pretty closely mirrors our growth rate in total assets, which means that we have not been able to take advantage of the leverage that comes along with growth. We have been investing aggressively in IT and customers care centers and complaints along – among other areas to accommodate our largest size and activity level and to posture us for future growth. However, I believe we are positioned to move the needle on efficiency with the upcoming acquisitions. I can tell you that we will be [ph] relentless in finding efficiencies to manage our efficiency ratio down to 60%. Additionally, the activity level we have seen from our loan production would normally produce solid growth in the balance sheet and an incremental revenue, but the environment continues to drop pay offs and refinances. This will ultimately subside and our assets will produce logical gains in the revenue with existing personnel and resources which has not been the case in the last couple of years. Dennis, I will ask you if you will to go through the slides and discuss the details of our financial results.

Alright. Thank you, Ed. Excuse me, I will start with our earnings highlights on Page 4. Earnings in the first quarter were up 21% over the same period a year ago at $9.8 million. Earnings per share for the quarter were flat at $0.32 compared to the same quarter in 2014 due to the capital raise – due mostly to the capital raise that we completed earlier this quarter during the first quarter. Our return on assets in the current quarter came in at 97 basis points compared to 105 basis points in the fourth quarter of 2014, again 96 basis points in the first quarter of 2014. Our recurring revenues for the quarter felt slightly and when compared to the fourth quarter of 2014, but we were up 18.6% compared to the same period a year ago. It was the first time in quite a while that we have had a linked quarter decline in recurring revenue and it’s down – somewhat Ed mentioned earlier. Average loans for the quarter were lower by about 1% than what we had in the linked quarter. Although average loans were lower and again repeating what Ed said we ended the quarter decently in total loans. And so we do expect to rebound in the second quarter on loan revenues. Slide 5 is more specific about revenues. I will hit that real quick. Net interest income on the tax equivalent basis for the first quarter was $39.3 million, an increase of almost 13% against the same quarter in 2014. Against the fourth quarter we showed a decline of approximately $1 million, which was mostly the result of two fewer days in the quarter. Loan production in the quarter finished strong with almost all of our growth coming in the last month of the quarter. Production for the quarter totaled $407 million of which we funded approximately 73%, that’s new and renewed production. That level of production is higher by 30% than what we had in the fourth quarter. And as Ed mentioned earlier our pipelines going into the second quarter are stronger and indicate that second and third quarter will be just as strong as the first. Our margins for the first quarter came in at 4.39%, which included about 34 basis points from accretion. With out the accretion our reported margin would have been 4.05%, which is 12 basis points lower than the reported amounts for the third and fourth quarter of 2014. The capital raised in the early part of the quarter boosted our short-term assets as a percentage of earning assets and cost us 10 basis points in the margin. This allocation of earning assets we don’t consider this to be permanent as we anticipate being fully invested in securities and loans shortly after closing the pending acquisitions. The remainder of the decline centers on lower yields on earning assets offset somewhat by lower deposit costs experienced in the quarter. On Slide 6, we highlight some of the successes we have had on non-interest income. For the quarter, we picked up 9 basis points on non-interest income to total assets with most of the best coming from our mortgage division. Mortgage had its best quarter on record posing 64% increase in total revenue when compared to the same quarter in 2014. The first quarter is generally our weakest quarter in mortgage, but our production was strong at almost $190 million. Our margins have held steady compared to where we were in 2014 and our pipelines going into the second quarter of 2015 indicate that we will have another strong quarter of results in mortgage. It’s easy to talk about revenue when discussing mortgage, but our net income in this division has grown quite as fast as revenue because of the discipline in the earnings structures we have. To breakout this segment, segment reporting is on the last page of our press release and you can see what I am talking about there. Our SBA division posted slightly lower levels of revenue than what we had anticipated at $1.5 million, with $17.1 million in closed loan production. We anticipate stronger second quarter given what is closed now and what we believe we will fund and be available for sale. Our ongoing challenge in this division is to recruit – is to continue recruiting solid producers that can keep our production levels moving higher. Lastly, our non-interest income service charges also climbed higher against the same quarter in 2014 by approximately 15%. Some of this increase relates to the incremental revenues from Coastal acquisition in June of last year, but the majority relates to strong sales of commercial and treasury-related products. On Slides 7 and 8, we cover operating expenses and I will present – I will discuss some of the information seen here. First slide on Page 7 shows that our core operating expenses have increased by approximately 23% when compared to the same quarter a year ago. As Ed mentioned, we just had not been able to enjoy the benefit of scale due to this grid we won’t, but we believe our recent investments and I see in compliance in other areas will pave the way for the efficiency gains we are looking for. A few notes about the increases we have seen in operating expenses here and some of what I am referring to here is on Page 8, 24% of our growth in operating expenses relate to the growth in revenue and scale of our non-interest income divisions, SBA and mortgage. Salaries in the first year – in the first quarter were higher than a year ago by $1.8 million, $1.4 million of that relates to the Coastal acquisition. Incentive accruals in the first quarter were higher than the same period a year ago by $1.25 million. Data processing and IT expense were higher by $800,000 than in the same quarter – first quarter of 2014. As we note on Slide 8, we have renegotiated our contract with our core service provider ahead of the two acquisitions Ed mentioned that are going to be pretty material on the number of accounts. We believe we are confident that we are going to see some meaningful savings relating to that renegotiation in the second quarter. The real driver on operating expenses and I am back on Slide 7 – the real driver on operating expenses is credit related cost, which came in the quarter at $3.2 million as much as we would like to be able to manage the timing of these expenses, it is just not always possible to have the expense and the resolution of the asset coincide in the same quarter. The nature of the expenses we incurred this quarter centered mostly on legal fees and other related costs associated with bankruptcies and larger loans that have been in the Florida courts for longer than normal period of time. We bought several of these larger deals closer to resolution with these actions, but we don’t believe we will see the lower NPA levels for another quarter or two. Beyond these specific assets, we are working detailed plans that I believe will result approximately $25 million of our NPAs this year with little incremental write downs or losses. The remainder of the presentation focuses more on the balance sheet. Slide 9 shows we ended the quarter approximately $79 million and legacy and purchased non-covered loans for an annual growth rate of 12.2%. We are continuing to get most of our growth from these three areas – from three areas which are municipal, mortgage warehouse and commercial real estate. Our commercial real estate production is generally split evenly between owner occupied and investor. Some of the bullet points we make here, as you can see municipal and mortgage warehouse both increased substantially during the quarter and both have better than average yields for the credit quality we see on these assets. Production yields are not that different from our portfolio yields and so the continued dilution in yields is slowing in spite of the fierce competition we are seeing in marketplace. Before I move on to the next slide, I will make a point about our forecasted loan growth relative to the pending acquisitions. The number driver of incremental EPS on the two deals is the degree to which we can get that money invested into loans. We forecasted we can achieve a 15% growth rate in loans and it’s fully invested on both signs by the end of the third year with a normalized earnings asset mix. Despite the headwinds we experienced in the first quarter we still posted a 12% annualized growth rate and finished the quarter with the strong pipeline. In the coming quarters we will be rolling out a high quality non-key lien mortgage product with arm structures adjustable rate mortgage structures in our mortgage division as well as the specialized commercial real estate division that will sharpen our sales and underwriting scales on larger loans. We are just now starting to see movement in our construction lending efforts and believe this could be material given our success with builder in our mortgage division. And these newer efforts combines with our existing niches and traditional lending efforts [indiscernible] to be confident that we can put liquidity to work in a shorter period than what we had initially forecasted. On Slide 10, I will highlight our deposit mix which continues to improve. Our growth in non-interest bearing checking accounts and non-rate sensitive deposits is noteworthy. We finished the first quarter with approximately 967 million in total checking accounts, that’s up 38% when compared to the same period a year ago. Combinations of the acquisition of Coastal in the second quarter and successes in our commercial and retail sales efforts led to this improvement. After the pending acquisition is closed we anticipate having approximately $2.4 billion of non-rate sensitive deposits or 53% which would be 53% of our total deposit base. Lastly before I turn the presentation over to the ground for questions, Slide 11 we discussed capital and tangible book value. Tangible common equity ended the quarter of 10.26%, that’s up sharply because of the capital rise pro forma with the pending acquisitions, tangible common equity is approximately 7.07%. Tangible book value per share ended at 13.01% but the pro forma with the acquisitions is $11.77. With that Catherine, I will turn it back to you for questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Frank Barlow with KBW.

Good morning guys.

Good morning Frank.

My first question is around the expense base, it sounds like there are some non-recurring items in there, so how should we be thinking about the expense run rate in 2Q I mean just here – just be down $1.5 million or $1.4 million roughly?

Frank that’s a good starting point. I am not going to sit here and say that there won’t be some growth. We are still finishing to build out and our customer care center to handle the new loans from BOA, that’s not going to chew up the entire $1.4 million that we discussed, but we share core operating expenses at $37.6 million. So, I think that going in run-rate for this quarter is probably closer to call it I guess $36.4 million, probably $36.5 million.

Okay. And you will mention the 60% efficiency, how quickly should we expect you all to get there or should we just expect it once the deals are closed?

Frank, I don’t think the assessment that can change overnight, but as you know we have been working on this for a while and we have had to make some investments to position us not only for these two deals, but for future deals, but shortly in the next two to three quarters by the end of the year we will be there.

Okay. And it sounds like you will have some excess liquidities from the capital raise and how quickly should that be deployed to help the margin?

Well, the question I think is how quickly can the funds be deployed in something other than securities, because it will be – it will be pretty much immediately invested, but more to speak because timing there, because right out of the gate we have forecasted the majority of it being in securities. Between some of the new lines of business that we have and what’s going in the bank, I have mentioned that initially we had forecasted, Frank, three years to get it fully deployed. We think we can move that – we think we can be fully deployed by the end of next year. So – and again, we just go back to those presentations we have forecasted 2% yield on securities and 4% yield on the line side. So, I mean, again, we think we can do that – we think we can manage those yields or better getting that earnings asset mix.

Great, thanks.

Our next question comes from Brian Hagler with Kennedy Capital.

Good morning.

Good morning, Brian.

Hey, Ed, you talked about the positive run-off BOA branches isn’t at this point nearly what you thought it might be, I guess that combined with Dennis’ comments about getting the excess liquidity maybe invested a little bit sooner than you would have originally thought. Can you just talk about I guess a combination of those two, what your thoughts are, updated thoughts are and what the accretion could look like?

Brian, we had initially forecasted or said that the EPS accretion on the deals was in excess of 15% – and granted where I guess maybe 45 days from closing the BOA deal or something like that assuming regulatory approval, but the fact that we really not had any deposit rentals is significant. The BOA transaction has about $20 million a year of non-interest income. We had forecasted about $16 million, because we anticipated deposit run-offs and some level of – we weren’t as oppressive in our retains as they were. We can close that deal with very little runoff that’s going to be significant to the EPS accretion that’s beyond how fast we can deploy the assets, that’s a significant driver, probably the thing we are most worried about, more worried about that, because we can’t control it than we were in the asset deployment. On the asset deployment side, I think getting these funds to work quickly, we think some of the landing niches we have and some of the lines of business, the mortgage – lot of business and the non-coop by the step we are thinking we are going to do is really going to help us on that and it’s really the reason we are more confident about how fast we could put it to work whereas in our initial forecast, in our initial models we anticipated not being at our full EPS run-rate on that until the third year. The third year EPS accretion run rate was closer to 20%. We were talking about 2016 where we would not have a traditional earnings asset base. So I guess what we are picking up – potentially picking up 5% on the accretion.

Brian I will add – I will just add I mean we are not home yet. We have got about six or seven weeks to go to get the June 12 closing. But we are confident because those banks that sells significant run off of deposits before close, they sell it within the first couple of months, within the first month or two. So the fact that we have not had and we have had tremendous positive response from the BLS staff. We are pretty comfortable that we are going to come in with less than 10%.

Alright, great. I appreciate the color. And then I guess I was going to ask what gives you confidence in getting the proceeds invested, I think Dennis just went through earlier, you are going to role out a few lending niches etcetera. And then also that you maybe have some visibility on payoffs or not so much after I guess what we saw this quarter?

Well, I think one of the advantages we have that we got to really talk about is when we have $800 million of deposits with the costs that low, we can be really competitive on booking production at levels and or above what Dennis has forecasted in the model that he just shared. So we continue to see pretty fierce competition. We would continue to see some irrational pricing occasionally. We hope we are not doing that. We don’t think we are. But we are going to be competitive particularly with our core customers who are just not in evolution [ph]. And so the low cost deposits will help us to maintain our margin and maintain maybe a slower pay down or payoff, but is also held with new production and our client lines are strong that we had never seen them and mortgage, SBA and our core production.

And then shifting to the efficiency ratio which was 72% this quarter, you talked about moving it to 60% maybe by the end of the year, how much of a positive impact does these two deals of loan have on that ratio. And then will the rest of the improvement just be a number of small things or what are you looking at?

We are looking at every single thing and quite honestly Brian we are disappointed, that’s the one thing we are disappointed and that we have been able to leverage the efficiency that we should have. But I will tell you if you want to stay in the good growth sense of the regulators and if you want to continue to grow at the pace we have grown, we have to make the investments early. We have to go ahead and make the investment and then – and have the overhead in place to be able to do the deals that we are doing and that we want to do, so that’s the big piece of it.

Brian, run out of the gate with the non-favorable earning asset mix more heavily centered in security, it’s about 250 basis points pick up. As we get further into the year and get more and more deployed into loans, it moves to – and I am going off of the core efficiency ratio I mean it moves that from say 68 to 62.

Okay.

The BOA transaction and the Merchants transaction are both positive on operating efficiency. I mean BOA has got two times the non-interest income that it does the non-interest expense. Without getting too specific, a lot of the investments that we need to manage almost all of these investments that we need to manage the BOA transaction incrementally it has – it has already been expensed – it is already being expensed. It’s already in our numbers. There is a little more investment we need 8 or 10 more people in our customer care center. We need a couple of more people on the IT side, but other than that, we don’t – we are not seeing a lot more incremental expense, that’s why where it’s positive on the efficiency ratio trends as we are.

Well, let me say it before you ask it. I mean, the logical question is has Coastal turned out like you planned or have you been able to do what you have said you will do and we are absolutely on track. And we are excited about what missed off to the company and we have seen the cost saves there to this point that we forecast. And we are really excited about what it’s going to do for us going forward.

I appreciate the details guys.

Alright, thank you.

Our next question comes from Christopher Marinac with FIG Partners.

Thanks. Good morning. And again there is any visibility on pay-down and then possibly about the call, but just curious on sort of how it was acting and sort of any I guess known pay-downs that are coming up as we can kind of help you project how the network works?

Yes, pay-downs, pay-downs in the quarter – pay-downs in the each month run about $80 million, that’s generally split halfway between just regular amortizations and payoffs. In the first two months of the year, it was significantly more than that with refinances pay-offs being significantly higher and I have got a graph, I don’t have it right in front of me where we have lifted this for the last two years. And every time the tenure treasury dips, you just see a spike in the refinances, again, particularly on commercial real estate. Again, that’s going to last forever, right, we will ultimately move the refinance business will slowdown. And I think that’s what’s going to – when you look at that, you know that’s going to happen. You look at that against our production levels, which is one of the things that give us confidence about where we are going to move on total loans in loan revenues. I forgot what the second part of your question was, Chris?

Yes. I was just going to – I think you covered that, I think we are good on the pay-down side. I guess my other follow-up just had to do with provision expense. Is the sort of behavior we saw this quarter of adding excess provision above and beyond growth? Should we see more of that and is this a rate that we saw this quarter indicative of kind of provision levels?

This is probably an indicative level. The reserve ended the quarter probably where the lowest has been I think in my 10 years. And so I mean, we had – I guess we had 8 basis points of charge-offs and still $1 million of provision. I mean, it might be a little high Chris, but I wouldn’t forecast it much lower given what we think growth is going to be.

Okay, great. And just last question is I had to do I guess with future M&A to what extent can you look at future opportunities as you digest two transactions you have here before?

Well, it’s difficult to forecast, I think the constraint Chris is how we feel we can execute. I mean, we have never asked the regulators to do two deals at one time, but we did. And they approved – as you know, the Atlanta region has been pretty tight with their approvals on M&A and certainly discouraged more than one at a time and they want some time on the sideline in between deals, but they let us do too. And I think when we get comfortable – when we get the conversions done and we get the integration completed and we are satisfied, I think the regulators would be okay with us moving forward as well. So, that would at least put us in the fourth quarter or beyond.

Okay, great. Thanks for the color.

[Operator Instructions] Our next question comes from Chip Dixon with DISCERN.

Hi, good morning guys. I would like to get a better understanding in your problem loan and OREO expense, just what kind of your expectation is for that is, obviously its chunky and weights on your earnings, that will be the first one?

Excuse me Chip. This quarter again like I have said it was mostly centered and legal fees and sort of related expenses tied to some larger loans. We had one loan that’s been a non-performing loan tied up in the Florida courts for 8 years. And we got $350,000 on that one loan just to get it to the point where we could resolve the assets and there is couple of others. Our largest non-performing assets probably $300,000 or $400,000 of legal fees tied up in a Florida bankruptcy court. I mean the Florida assets got to where we could resolve that. Not all we had less than $1 million of OREO write downs and losses and the rest of it was just entered on maintaining on fighting the courts and fighting lawyers on existing property.

So it really – Chip it’s really indicative of what’s taking a little bit more aggressive attitude. I mean for several years we have said we are going to be cautious about writing tickets, big tickets. We are going to trying at retail and let it move as the market will accept it. And so what I think you will see in the first quarter numbers is what we expedited on several larger deals and certainly we need to get this behind us and move on. And we have took this fetch and like we already said that SBA [ph] will come off probably in the second quarter, possibly third quarter, but mostly in the second quarter.

Yes. So but that it should be a source of operating leverage going forward – perhaps going forward with lower level of costs in this market, right?

Exactly and particularly I mean if you were just to look at the cost and then if you project in 2016 we should be picking up $0.30, $0.40 from that.

Okay. And you talked a lot about the regulatory and compliance costs that you bearing, can you talk to how big a compliance cost, regulatory costs growing as a share of your expenses and when do see them plateauing?

I don’t think. I think until the pendulum swings as the company like ours continues to grow I think you are going to see the costs growth incrementally as well. The DSA in particular is the hot issue now and that’s where we have added significant resource in the past year. And I think going forward we will see incrementally more additions later. But I don’t see the regulatory burden becoming less and the closer you get to $10 million of the [indiscernible]. So that’s not the answer I would like to give you, but I do see it coming that’s the world we live. And I think we are going to have make accommodation for that and cover with non-interest income or some other revenue source.

So but for that I guess foreseeable future the intermediate term your regulatory compliance costs should grow as a share of total expenses?

Yes. That’s very – that’s frustratingly one of the expense categories that I do not believe will be scalable with total assets. I think it will be that’s not in the area where we are going to try to get the leverage. Again to get to the 60% we mentioned it’s not going to be something that we do in the compliance area.

And then just last question from your seat what’s your sense of the economy, is it solid, is it accelerating, is it kind of just kind of…?

We see pockets of weakness still along the Georgia Coast job because St. Mary’s [indiscernible] in particular we see otherwise pretty solid improving albeit slowly improving economies. I think our pipeline is indicative of that. And there is just a better mood if you will amongst people that we have talked to everyday. They are moving willing to invest now, not aggressively invest, but invest. And I think we will continue to see some improvement.

Thank you very much.

Thank you.

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