Ameris Bancorp (ABCB) Q2 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Ameris Bancorp Second Quarter 2015 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Dennis Zember, Executive VP and Chief Financial Officer. Please go ahead, sir.

Thank you and thank you all for joining us today on the call. During the call today we’ll be referencing the slide and the press release that are available within the Investor Relations section of our website at amerisbank.com. Ed Hortman, 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’ll remind you that our comments may include forward-looking statements. These statements are subject to risks and uncertainties and 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 any forward-looking statements as a result of new information, early developments or otherwise, except 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 the reconciliation of these measures and our GAAP financial measures in the appendix to our presentation. With that, I’ll turn it over to Ed Hortman.

Thank you, Dennis, and good morning everyone. Thank you for joining our second quarter earnings call. I’m going to highlight a few points on our second quarter results, our two recent acquisitions, as well as make a few comments about the credit related charge that we took during the quarter. First on the results front, we reported operating earnings of $12.3 million or $0.38 per share compared to $10 million or $0.39 per share a year ago. Although the operating earnings for the quarter were 23% higher than last year, we issued more shares in the first quarter for the acquisitions which caused the earnings per share to be $0.01 lower. The operating results exclude two one-time non-recurring charges, approximately $3.7 million or $0.11 per share of after tax merger related costs associated with the Merchants & Southern and Bank of America transactions that we closed during the second quarter. It also excludes an after tax charge of $7.3 million or $0.23 per share for charge against other real estate and private loans that I will elaborate on in a moment. Our results were highlighted by a few items that Dennis will cover in more detail when he goes through some of the slides, but we had a rebound in spread income of $1.9 million compared with the first quarter of this year thanks to a much higher average loan balance. These increases in average balances and steady yields on loans offset a decrease of about $500,000 in accretion income when compared to the first quarter. The accretion income totaled $2.6 million for the quarter and it’s down to only about 4% of our total revenue. Non-interest income increased to just over $20.6 million, thanks to strong results in mortgage, SBA and deposit related charges. Because we closed the branch purchase transaction late in the quarter, there was little benefit from fee income. Going forward we expect about a $3.5 million lift beginning in the third quarter, an additional fee income at a little higher than that after we finished conversion of Merchants & Southern in September of this year. Operating expenses on the bank side increased $400,000 in the first quarter and about $1.9 million higher on the loan business side. This represented about 55% of incremental revenue from the line of business, so that was accreted to our efficiency ratio. As I mentioned earlier, we took the one-time non-recurring charge related to credit in the second quarter totaling $7.3 million on an after tax basis. Up until this quarter our plan has been to be very deliberate with asset dispositions and maximize the price on each piece of other real estate sold, as compared to the wholesale type strategy that would have been much more costly and this strategy was very successful for us. At this point we’ve worked the balances down to a more manageable level, where we feel it is important and appropriate to take this charge to expedite the sale of the selected remaining assets in the next couple of quarters. The result will be normalized credit costs that are more predictable, driving more consistency in our earnings. In short, I believe the pathway to a clear multiple on our earnings lies in a more stable and reliable profits and this charge will make that possible. Dennis will talk more about the impact on earnings going forward and the results that we expect. And lastly, I’ll comment on our two acquisitions. We closed both transactions in the second quarter and have already converted the Bank of America branch purchase. Shortly after the September 25 conversion of Merchants & Southern, we will have all of our cost savings in place as we move into 2016. These two acquisitions grew our balance sheet by 29% and along with our capital raise we have higher tangible common equity and tangible book value than before we announced the deals. Although the Bank of America branch purchase was $125 million smaller than we forecast, I’m confident that we will still achieve the metrics that we laid out. I’ll ask Dennis now to go through some of the slides and discuss the financial results in a little more detail for the quarter. Dennis.

Thanks Ed. I’m going to be referencing the Investor Presentation that we filed this morning and that’s on our website in the Investor Relations section. Let’s start on slide 4, which is our second quarter operating results. Our actual earnings of $1.3 million for the quarter included the charges Ed mention and to recap we took a charge for M&A cost of $3.7 million or $0.11 per share and a charge to aggressively write down OREO and select problem loans totaling $7.3 million or $0.23 a share. Adjusting for these we get back to the operating results of $12.3 million or $0.38 per share. Against the same quarter in 2014 we had a 15% increase in net interest income and a 30% increase in non-interest income. Spread income has increased over the last year from organic growth in earning asset, offset somewhat by margin compression, as well as from the acquisition of Coastal Bank in June of 2014. Non-interest income growth continues to be noteworthy for us where every line of business or revenue source that we have has posted really nice improvement. Core operating expenses were up about $8.3 million against the same quarter last year. In a minute I’ll discuss current trends against the first quarter this year in more detail, but this year-over-year growth comes from the Coastal acquisition, it comes from the growth in the line of business expenses and some amount spent getting ready for the recently closed acquisitions. I’m on slide 5 now where we projected our total revenue for the next couple of quarters. These projections exclude any accretion income, which for the second quarter was about $2.6 million. These forecasts show about an $8.1 million pickup in total revenue in the third quarter of this year and a $12.8 million pickup for the fourth quarter. These forecast hinge on our ability to better allocate the $1 billion or so growth in earning asset that we just closed and record approximately $16 million per year of deposit oriented fees, $4 million a quarter from the branch purchase. These are achievable targets and they do no assume any additional growth from any of our lines of business. Slide 6 highlights our non-interest income and the fact that our mortgage and SBA divisions earned slightly more than $4 million after tax in the second quarter of this year compared to $2.3 million a year ago. Both divisions have strong pipelines and activity going into the third quarter, which lead us to remain positive about what their contribution will be for the second half of the year. Slide seven shows operating expenses at the bank [were tame] [ph] only growing about $400,000 when compared to the first quarter of 2015. This is noteworthy given that the spend levels were higher than normal preparing for the recently closed acquisitions. On the line of business side, expenses did increase $1.9 million, but as I alluded to earlier, this increase ties directly to strong revenue and earnings growth at divisions and improved our operating efficiency. A sizable portion of the savings we anticipate from the deals comes from consolidating the overlapping branches that we expect have completed before the end of 2015. This savings along with the higher yields we are seeing on the liquidity deployment strategy were more than offset, the loss revenue from the deposit runoff we had and as Ed said earlier, allows to hit the targets we projected. Let’s skip to slide 9 and talk about the credit charge and credit costs. Not to repeat Ed’s earlier comments, but our earnings and performance improvements have been overshadowed by volatile credit costs. We expect material improvements in the coming quarters from the acquisitions and it is time to take this charge and be in a better position to deliver consistency in our result. We’ve looked at our spend levels and believe that normal credit costs for us are somewhere in the $2.5 million range, which includes general provision costs and not just costs for problem assets. Lastly, the slide shows $13.9 million of credit costs. Not all of that was included in the one-time charge that Ed mentioned earlier. Just a couple of comments on some balance sheet trends, before I turn it back to the operator. Slide 10 shows total loans increased $605 million during the quarter to $3.4 billion. Of this growth, about $125 million was organic growth, which is about a 15% annualized growth rate. We had good growth from our mortgage warehouse and municipal lending division, as well as in our bank that had the strongest pipeline yet going into the third quarter. Also during the quarter, we picked up about $192 million of loans from the Merchants & Southern acquisitions and about $269 million in purchase mortgage bills. Slide 11 provides a little more detail on the purchase mortgage bills that we’ve added. Essentially what we’ve done is look for certain types of mortgage bills that have about a three year duration and what we consider to be good credit metrics. The three folds we added in the second quarter have original loan to values under 60%, with good FICOs and debt ratios. Most importantly these assets require no additional overhead burden and when rates do move higher, we will not have the market to market yet that comes along with mortgage backed securities. We are looking at some additional pools now that we have pretty much the same characteristics. We believe we can close it before the end of the third quarter. Skipping to slide 13, we know we came in slightly ahead of our forecasted accretion detangible book value from the two deals and the capital raise around 5%. The branch purchase transaction being smaller also benefited our leverage ratio, which slows slightly higher ratios than we had at the end of 2014. The last slide in the deck lists a few points that we believe make our story attractive. First and foremost we traded a material discount to our peers on earnings, which is our opinion is due to the inconsistency of our results from credit costs. The credit charge we discussed will remove that overhang and allow us to introduce more reliable results going forward. The integration of the two acquisitions and the deployment of the funds with limited overhead, we see a pathway to our efficiency target and an all way and a return on tangible capital that should fit us in the top four tunnel of our peer growth. Lastly, M&A is still a driver for us on earnings growth and activity is as good as we have seen it in the past. With the relationships we’ve already had in place, we believe we can mostly avoid auction and still succeed in this environment. Our recent deals have lower than normal execution risk in our capital and regulatory reputation do not pose any kind of roadblocks to continued activity. With that I will turn it back to the operator for questions.

Thank you [Operator Instructions]. Our first question comes today from Brady Gailey with KBW.

Hey, good morning guys.

Good morning Brady.

So the $2.5 million of normalized credit costs per quarter, is that something that you think will happen in the back half of this year or is that more a 2016 event?

Brady we expect that in the third quarter and going forward.

Okay. And then as you marked these NPAs down and you have a little over $43 million at the end of the second quarter, what do you expect the NPA balances to be at year end, kind of after you’ve sold what you are going to sell?

While Dennis is looking at the slide to give you that, I’ll just tell you that the balances that we have were already marked at about 10% of so below appraised value or valuations that we had, and so the mark we took was in excess of that, so we could go ahead and get it moved out in the next two quarters and I think, Dennis he has that number now.

Brady, you said $43 million which is more of our legacy. We actually include the purchase non-covered as well, so for the quarter we ended with $74 million and we see that trending somewhere below $50 million by the end of the year.

And then on the margin as you all deploy the liquidity that you acquired, once it’s kind of all done by the end of the year, where do you expect the margin to be next year in 2016.

Going off of our margin in the second quarter and then adding in the new liquidity and the new earnings assets, our target yield on the earnings assets is around 3.15. That was our target yield. With that, that took us to 3.70 in the third quarter and probably 3.80 as we had better deployment in the fourth quarter. That number does not include any accretion which is still about 20 to 25 basis points. Next year Brady I think there will still be a little bit of compression at the end. I mean probably 3.80, 3.85 for next year.

Okay, and you are talking about the margin there and not the just yield on earning assets.

I’m talking about our margin. I think for the fourth quarter we’ll be in the 3.80 to 3.90 range and then it’s for next year assuming – again, I’m assuming rates never go up and that we’d continue to have a little bit of compression we’d probably stay somewhere in that range.

Okay, and then the accretion, you are running around $2.5 million, $3 million a quarter. Will that kind of stay at that level for the next year or so or will we start to see that decline off?

We have about $32 million of accretable yield left. So I mean that’s another 12 quarters. So I think $2.5 million is – I think, I should have said that earlier, but I think $2.5 million is at least a good number for the next couple of quarters.

Okay, great. Thank you.

All right.

The next question comes from Nancy Bush of NAB Research.

Good morning. How are you?

Good morning Nancy.

Yes, I’ve got a couple of questions. On the real estate disposition, can you just give us a little bit of color about what types and perhaps any markets that these reside in and how you expect the sales? Is there going be – how long is it going to take to get this sales done?

Yes, Nancy. The majority of the property are Coastal [Orient] [ph] and Coastal Georgia, and sort of in the Panhandle area, south of Tallahassee, Crawfordville area, where the majority of the assets are, although there are some scattered all over. The assets that we wrote down, we are already seeing good activity on. The values that we wrote these down to are, some of these markets it really didn’t matter how low we wrote the value down to, there is just not that much activity. So the values we went to on these were levels that we have been seeing from interested parties, although a lot of them are bottom fishers so to speak, so.

Okay. Are you guys going to be disposing of these yourselves or are you going to be using outside brokers to do this or you know how is that running?

We’ll be doing in our sales, of course we have all of the properties listed, but we will not be using private equity or auctions style effort almost it is.

Okay, my other question just has to do with all the things you’ve got going on right now, which is quite a bit. If you could just talk a little bit about your asset sensitivity and looking at your margin, the margin projections that you have for next year. What assumptions are you making about deposit pricing in there.

Okay, and Nancy that’s a good question. I skipped slide 12 in our investor deck, but the slide at the bottom right of that shows that with the two deals we just did, more than 100% of our fixed rate loans are funded with non-rate sensitive deposits and that’s really checking account, savings account and NOW accounts. We are not too foolish to believe that when rates start going up, our deposit book will look a little more rate sensitive than it does now. But these two deals and the short term nature in which we are deploying the liquidity has taken us to be slightly asset sensitive. We were slightly liability sensitive coming into the two deals, a lot of that’s the product of us having a lot more effort on fixed rate lending where a lot of customers have wanted, but these two deals and the liquidity they brought have changed that for us.

All right. Thank you.

The next question is from Christopher Marinac with FIG Partners. Please go ahead Christopher, perhaps your line is muted. All right we will take our next question and that question is from Peyton Green with Piper Jaffray.

Yes, good morning. Ed I was wondering you could talk a little bit about the organic loan growth. It certainly seemed quite strong and maybe talk about the pipeline and geographically where you are seeing the lift.

Good morning Peyton. We gave guidance for the first part of the year of loan growth in the 10% to 12% range and I think that’s still where we are going to see it. Our coverage runoff is about what we expected it to be. We did have a little over 15% organic loan growth in the second quarter as you mentioned. About – a big part of that real estate, 21% or so owner-occupied, 22% is probably investor related, 21% or so is municipal lending and then some single family construction. But it’s, our growth markets that we’ve had for the last two years are still the markets that we are getting the growth from, that’s not changed, so the larger MSA markets like Charleston, Atlanta, Savannah and Jacksonville.

Okay and then maybe if you can talk just a little bit about competition, was there any expectation by the customer base that’s rates are going to lift a little bit from the fed or is it still more competitive at the margin and then maybe what your new loan yield was in the second quarter?

Payton, it’s been competitive, it’s still competitive and it’s going to be competitive. That’s not going to change and I think our company has won on relationship and I think we will continue to do that. Having said that, when we look at our pipeline our closure rate on our pipeline is not what it was three years ago and I don’t know, that’s probably that we expect it to continue, which means we just have to work a little bit harder and getting kind of more prospects. We are pretty comfortable that we will continue to see double digit growth organically and loan yields Dennis, you want to speak to that, it’s just remarkably stable.

Yes, loan yields on new production comes in about 4.5% for the current quarter and that is a mix of fixed and floating, still geared more towards the fixed side, but given the stronger push that we’ve had on production, especially with the liquidity, we are pleased with where we are in incremental pricing.

Okay, great and then Dennis maybe speak to what your exception is for earning asset growth in ’16 versus ’15 is the thought that you will use any organic loan growth to basically take advantage of any cash flow that you might get from the securities book or the loans that have been purchased or just maybe heading to that.

That’s a good question, because the way we are trying to set up the mortgage pulls, which is where we are going. We will probably deploy in the late half of the incremental fleet or the liquidity and we think there is going to be $125 million to $150 million of cash flows after those and that we’ll be able to move that back into the commercial. I mean long term we are not trying to manage a larger book of mortgages, but we do think – we do want to keep that cash flow coming in, so that the balance sheet will look more traditional. I guess to answer your question is I think it will be more time [ph], organic growth in earning assets next year because it will be still be some rebalancing. That being said, I mean we are still growing deposits. The banks, Ed mentioned 15% loan growth which we were hoping to get to 15% sort of on a run rate by the end of this year, and then they are really first and second quarter. So I mean we are still positive, but it will be more time than it would have been otherwise, simply because we’d be remixing our earning assets.

Okay, and then last question; I promise I’ll hop out. But maybe with regard to the mortgage business, I mean on EPS basis they contributed to them since they started earnings from the second quarter and that was up from $0.06 a year ago and $0.08 in the first quarter, even with the new shares. The SBA business contributed a similar kind of $0.03 in the quarter. Maybe talk about how those businesses look for the back half of the year. Thank you.

Yes. Mortgage is as strong for us as it’s been going into the third quarter. We’ve got stable down sale yields; we’ve got a majority of our producers substantially over our target monthly productions go. Both the pipelines is big as it’s ever been. I mean at least in the third quarter mortgage looks really good for us. We are still recruiting a few producers, especially in the new markets we serve, Gainesville and some other areas and so mortgage is going to grow. I think the pace of growth isn’t going to be what we’ve had in the past few years, but I mean mortgage is going to stay we think pretty profitably and on an upper slide. FBA we retained and we mentioned it a little in the press release, but we retained some mortgage loans that would have contributed a little more – excuse me, SBA loans that would have contributed little more to the bottom line there. The pipeline on SBA is good and the gain on sale percentages were getting very good as well. We are considering and we haven’t decided for sure whether or not we’ll just retain the SBA production for the third and fourth quarter to help with the asset deployment strategy, the new liquidity, so that’s my impact in the third and fourth quarter results in SBA.

Something for the fourth quarter mortgage, but Payton we would expect fourth quarter the mortgage in the fourth quarter to be down a little bit like it typically is every fourth quarter.

Sure, great and then well last one I promise, maybe thinking about kind of the overall banks contribution to earnings. I mean if you backup the total one-timers, I mean your earnings profiles still kind of flat year-over-year. Ed may be you talked about the goal in driving better earnings out of the bank to maybe offset mortgage overtime and then SBA.

Well, I think Payton the think to look at is what the M&A activity has brought there and we are pretty pleased with the interest income growth we’ve had, non-interest income growth we’ve had and we’ve expect that to continue, maybe at a slower rate of growth, but I think the main contribution has been really strong and solid. It’s just been masked a little with the volatile credit costs and I think we are moving that and making that component a little more stable and reliable and is really going to cast some light on our good bank performance.

You had more operating leverage going forward on of the bank where it’s, but not as pronounced in the past.

And Payton, I’ll add one more thing, Ed mentioned earlier he was talking about the 10% to 11% growth. This is the first year since we – our guess is we are going back a long way that our combined loan growth is going to be in double digits and that includes the covered runoff. So for the last couple of years we’ve produced $10 of new loans and we’ve ran off $10 of covered loans or at least covered yields. And right now if you look at the first half of the year, we are tracking to be better than double digit growth in combined loans and so that’s going to help some of what you’ve seen in kind of flat contribution from the bank. The M&A deals, to recap what we said earlier, but the M&A deals are going to provide really incrementally profitability to what the bank is doing, to really increase the banks contribution as well. I think you’d seen mortgage and SBA to close out a dip. Mortgage and SBA will continue to grow and they are important to us and we like what they do for their return on assets and capital, but I think you are going to see the bank growing at a little faster pace and the bank still is 80% or so of our total results.

Okay, perfect. Thank you for taking my questions.

All right.

[Operator Instructions]. This concludes our questions-and-answer session. I would like to turn the conference back over to Dennis Zember for any closing remarks.

No closing remarks, except thank you for participating and call or email with any questions you might have. Have a good day.

Thank you, sir. The conference is now concluded. Thank you for attending. You may now disconnect.