Ameris Bancorp (ABCB) Q1 2016 Earnings Report, Transcript and Summary

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

Thank you, Aaronson, and thank you to all of you for joining us today on the call. During the call we’ll be referencing the press release and the financial highlights that are available within the Investor Relations section of our website at amerisbank.com, as well as on the SEC’s website. Ed Hortman, President and CEO and myself will be the presenters today and available after our 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. 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 forward-looking statements as a result of new information, early developments or otherwise, except as maybe required by law. Also during the call we will discuss certain non-GAAP financial measures in reference to the company’s performance. We’ve included a reconciliation of these measures and our GAAP financial measures in the appendix to our presentation. And with that I’ll turn it over now to Ed Hortman.

Thank you Dennis, and good morning to everyone and thank you for taking the time to join our first quarter earnings call. I will highlight a few items on our quarterly results and provide an update on our recent acquisitions of Jacksonville Bancorp. First about our results; we had a good start to the year reporting operating earnings of $0.50 per share, up 56% from the $0.32 per share that we reported in the same quarter in 2015. Total operating earnings for the quarter were $16.5 million, which is an increase of 68% from the same quarter in 2015. It’s important to note that Q1 is the first quarter that includes the fully integrated results of the two acquisitions that we made last year. Our operating earnings for the quarter, excluding the costs associated with the merger of Jacksonville Bancorp, which totaled $4.1 million after tax. These amounts include investment banker and attorney fees, severance costs associated with integration of the back office functions, lease termination costs, and other miscellaneous costs. We believe we've fully recognized the integration costs associated with Jacksonville Bank and we don't anticipate any material amounts in future quarters associated with this transaction. When including the merger costs, our earnings only grew 26% to $12.3 million, when compared to the same quarter in 2015, and earnings per share increased 18% to $0.37 per share. On an operating basis, our return on assets increased to 118 basis points in the first quarter compared to 97 basis points in the same period last year. Our return on tangible capital increased to 15.4% in the first quarter of this year compared to 10.4% in the first quarter of 2015. The increase in both ROA and ROTCE are driven by having our liquidity position almost fully deployed, strong growth in net income from our lines of business, and improved operating efficiency in our core bank. I want to credit our outstanding bankers with achieving this kind of top quartile operating performance. We’ve built a model that will deliver top quartile results in an extended low interest rate environment. Some quick details about our earnings components, our spread income for the quarter totaled $50.4 million, which was an increase of $11.6 million or 30% over the same quarter in 2015. Against the linked quarter, spread income was up $1.8 million or 4%. This improvement in spread income over the linked quarter was driven mostly by $180 million of growth in average earning assets as well as slightly higher margins, and Dennis will give some color on the margin in the few minutes and discuss in more details some of the moving parts later. Non-interest income for the quarter was $24.3 million, which was 173 basis points of total assets. This level of non-interest income represents growth of 38% over the first quarter of last year and 8.4% higher than we reported in the fourth quarter of 2015. Obviously, mortgage and SBA led the way with really strong growth over 2015 levels. Mortgage volumes were about the same against the fourth quarter, but our open pipeline increased rather dramatically helped in part by lower rates but mostly from the increased philosophy from our builders and realtor customer. SBA had a great quarter of sold loans, and the pipeline for closed loan production in the second quarter looks promising there. Deposit charges were up 54% against the same period a year ago before we completed the Bank of America branch purchase and M&S transaction. Overdraft and debit interchange were lower compared to the fourth quarter of 2015, which is attributed mostly to seasonality. Outside of our lines of business, our bank has about 90 basis points of non-interest income to total assets which is strong in and of itself. Non-interest expense on an operating basis was down $2 million for the quarter and came in at $49.2 million. That number includes about $400,000 of expense for Jacksonville Bank. We have implemented additional initiatives in the first quarter and strategies that give me confidence that will have additional improvement in efficiency levels throughout 2016. The first quarter is normally a seasonally slow quarter for us, but we posted organic loan growth of $78 million or 9.9% annualized rate. That gives me confidence that we will achieve our loan growth forecast of greater than 13% for the year. We continue to have impressive growth in checking accounts and low cost funding. During the first quarter, we grew checking accounts organically, excluding M&A by $68 million for an annualized growth rate of just over 20%. Our pipeline on treasury, retail, and commercial deposit prospects is as good as it's ever been and our larger presence in key growth markets is really paying off. Additionally, our treasury group and our commercial bankers have identified key underserved areas where our expertise and solutions bring real value to the table. These efforts will continue to drive deposit growth at similar levels as loan growth, we believe. And lastly we closed the Jacksonville Bank transaction on March 11 with virtually no dilution to tangible book value. That’s important because we’re serious about building tangible book value through our earnings and protecting it through our M&A transactions. We had no surprises on the Jacksonville Bank closing. We closed with more loans and deposits than we forecast and there was an improvement in overall credit quality from initial projections. The data conversion is scheduled for mid-May and we should have the bank fully integrated by the end of the third quarter of 2016. I'm excited about having Kendall Spencer and his team onboard and have high expectations for their contribution in a really key market for us. Our committed focus remains to produce organic loan and deposit growth and to deliver consistent operating results that places us in the top quartile of our peer group. With that said though we still looking at M&A opportunities, and I'm confident that we will have opportunities this year that meet our criteria, especially with the improvement in sentiment, as we have moved through the first quarter. We’re going to remain disciplined and to pursue M&A and look for deals that are franchise-accretive, very little book value dilution, and of course the appropriate earnings accretion. Dennis, with that I’ll turn it back over to you and you can discuss some of the details behind our quarter.

All right, thank you, Ed. Let's start on the net interest margin; for the quarter our margin came in at 4.03% which was up five basis points from the linked quarter. We had accretion income of $2.9 million in both quarters. So putting that aside our margin increased from 3.74% in the fourth quarter to 3.8% in the first quarter this year, again with no accretion. We expected to be a little tighter on liquidity in the first quarter then how it turned out. Short term asset averaged just over 4% of earning assets. As we go into the second quarter short term assets stand at just below 2% of earnings assets, which should give us about five to seven basis points of additional margin. We do see -- incremental production on new loans is slightly below our portfolio yields. So the ultimate improvement to margin could be slightly lower. The incremental margin, meaning the growth in net interest income over the past 12 months divided by the growth in earning assets came in at 3.46%. Ed and I are really pleased with this level, especially given where we’ve deployed the liquidity in the short term and some of the forecasts we have made when we announced the deal last year. Our pricing on new loan production which you can see in the supplement to our press release came in at 4.42%, which is down about 26 basis points from where we were a year ago. Production though -- the amount of new loans we produced has increased by 30% when compared to that same quarter. Overtime we are confident we are going to see more assets concentrated in our traditional commercial portfolio. So I believe there is still some margin to be gained in the coming year, so even in a lower loan growth environment. Non-interest income came in at $24.3 million, which is up nicely from the linked quarter and up about 38% from a year ago. Mortgage, as Ed mentioned, mortgage did have a great quarter income wise although originations were pretty consistent, volumes were pretty consistent with the linked quarter. Moving into the second quarter, we expect to have pretty nice gains in origination income and expect to see the expansion of our open pipeline. We’ve provided some new mortgage statistics in our supplement and when you compare our retail mortgage statistics to the same quarter in 2015, almost all the metrics look strong and give me confidence on our 2016 net interest income forecast for mortgage. Additionally, we are just about [indiscernible] at this point and our average time to close a loan is back down to 15 days even with the new disclosures and the new process. That kind of success gives us a serious advantage with realtors and builders and in our recruiting efforts with new bankers. SBA income, against the same quarter in 2015 was up strong as well. Improved contribution was about $300,000 after tax or 56%. Our pipeline going into the second quarter is pretty strong and we expect solid results for the second quarter as well. Our systems -- we've made this point before too, our systems and support in this line of business are all in place and very scalable. So any new producer we recruit should be almost immediately accretive. Ed mentioned service charges earlier, we are down couple of hundred thousand in the quarter against the linked quarter. And we noted in our press release a few changes to our normal routines on service charges. But the most major item that we've noted is a more intuitive overdraft system that should be more accommodative on our stronger customers and help us identify the more risky decisions we make that would let tighten up our losses. Operating expense control was really solid in the quarter. Ed and I attribute a big part of the quality quarter we had to the gains we made on efficiency and on net overhead. As Ed mentioned, some of the – some small amounts of Jackson Bank expense are in our numbers given that we closed in early Mach. Aside from that we would have reported flat expense levels in salaries and benefits and data processing. We saw improvements in advertising, occupancy and FDIC amortization, indemnification amortization expense which helped push core operating expense down by about $2 million in the first quarter compared to the linked quarter. We still have a couple of branches yet to close. We have restructured the bank's management structure. We've adjusted some support from our core provider. We think all of these strategies should start paying dividends in the coming quarter and throughout the rest -- the second half of the year. We have talked quite a bit about improving our efficiency and overhead metrics. And I want to make a point real quick about what was accomplished over the past year with respect to net overhead. Net overhead on our operating basis, meaning operating expense minus non-interest income increased only $1.7 million in the first quarter of 2016, compared to the same quarter in 2015, despite a 37% increase in average total assets. This incremental net overhead ratio of only 45 basis points is what's driven the meaningful improvement we're reporting in the first quarter. As Ed mentioned earlier we closed Jack Bank in the first part of March. So going into the second quarter I'd expect we would see about $5 million of incremental spread, about $250,000 of incremental non-interest income and about $3 million of operating expense per quarter. The conversion is about a month out. So I expect us to be on our full run rate with Jack's Bank going into the fourth quarter of this year. And with that, Aaronson I'll turn it back over to you for questions.

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

Hey good morning, guys.

Good morning Tyler.

Hey, maybe just to follow-up on the opening M&A commentary. Can you give us little more detail on the M&A landscape today. You mentioned the improved sentiment from sellers. And I was just curious if their pricing has increased, the pricing expectations has increased in tandem with the improvement in sentiment? And then just any update on particular geographies of interest or focus and size you will consider?

Tyler, I would characterize M&A similar to the way I have for a while. Now there is a lot of activity, there is a lot of conversation, there is a lot of relationship building among all sizes of banks. And there is the timing issues that you typically deal with. The way we approach it is we're $6.1 billion or so. And we're in the sweet spot for profitability from $6 billion to $10 billion. So we don't want to be in a position to motor [ph] through that too quick. We want to have a lot of discipline around the way that we do that. So pricing is an issue. I don't think it's an issue for a deal that meets our criteria. We have several banks that we are in talks with, that I don’t think the pricing is going to be the main hurdle. Obviously in some transactions it is, but with our currency and with the track record of our currency, I think we have a pretty significant advantage.

Okay, thank you.

You asked geography…

Yes geography, and size as well.

I think geography, we’ve said that we want to continue to leverage in our key growth markets, and that would be in Jacksonville and North Florida. It would be in South Carolina, it would be in Atlanta, it would be in -- well I see, I covered them all.

Probably, still probably in the $500 million to $1.5 billion range.

Got it. Okay. Dennis, on expenses. Can you walk through the math of what we should expect to see from Jacks B, the cost saves from the conversion, the branch closures, and everything you guys are doing behind the scenes. Can you walk through that math one more time?

Okay, we had forecasted -- the cost savings we have forecasted do not include any branch closures. So most of the cost savings we are -- all of the cost savings we’re going to get -- we're going to be on the salaries and benefit side, core operating system, lower levels of professional fee, and lower levels of credit costs. We’re forecasting $3 million of Jacks Bank of incremental operating expenses in the second quarter for Jacks Bank. That’s down a little bit from where their core run rate was. I think when it’s all said and done, we will probably be somewhere closer to $2 million range on operating expenses. Probably and Tyler the majority of that’s going to be salaries and benefits from consolidating their back office.

Okay, and on the fee income, the implementation you guys talked about in the press release on the statement costs, just to be clear that the positive $2 million impact realized in the second half, is that an annual number or just how much you would expect to see in the second half of the year?

An annualized number.

Okay, got it. And then last one from me. Any outlook on the tax rate, it's little bit heavy this quarter?

It was heavier this quarter, but we’re paying some California State income tax as well as more South Carolina State income tax whereas last year we didn’t. So last year we were probably running 32.5% on the effective rate, and this quarter it's about 33.6% I think. I don’t think it’s going to go up. But I think probably what we reported this quarter’s more in line with what will happen till we get some effective strategy.

Okay, got it. Thanks guys. Congrats on a nice quarter.

All right, thank you.

The next question comes from Casey Orr of Sandler O’Neill. Go ahead Casey.

Good morning.

Good morning Casey.

Just wondering with respect to the mortgage segment, can you give us some more color on what drove the gain on sale margin up so much? It looked like that went from around 3.55% last quarter to 4.10% this quarter which strikes me as a pretty healthy jump?

Some of it was, we were almost 100% hedged. Generally, we’re not -- we only hedge about probably 85% or 90%. So we’re 100% -- almost a 100% hedged, the fall in interest rates. There was some gain that we picked up from that as well.

Okay, great. And then just wanted to add on to the earlier question about expenses. I guess can we quantify how much you expect to see from the branch closures and the other moves you mentioned earlier when we put that against the $3 million or less in Jacksonville expenses coming on. I mean where should we expect quarterly expenses I guess to flesh out at the back half of the year?

We have been forecasting operating expenses probably at the $48.5 million range, at about the $48.5 million range. We were probably a few hundred thousand over that, when you normalize what Jacks Bank added in the quarter. I think closing the extra branches and some of the other strategies that we have in place are really designed to hold us steady at that level, let us still sort of reinvest. I think once we get Jacks Bank modeled in, probably let's say at the $2 million range, we're probably looking at somewhere between $50.5 million and $51 million a quarter.

Okay, great. That's helpful. And then I guess putting all together, are you still pretty confident that you'll be running with this 60% or below efficiency ratio by the end of this year?

Ed is shaking his head, yes. Yes. Yes, I mean we are -- I'm not sure about it.

Casey we're trending down, little with 65% and change. We've got things in place that we expect to see that continue incrementally to improve in the second quarter and third quarter, both quarters. And what we think is the fourth quarter of the year we should be operating in that 60%-61% range.

Great. That's helpful. Great quarter, thanks.

Thank you.

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

Thanks good morning. Dennis, if you had Jacks B for the whole quarter, would the core margins have been higher or lower from what was on the release?

Maybe a tick higher, given, especially given that we're -- and I'm looking at margin without accretion at 3.80%. We're modeling a higher margin for Jacks Bank. And that some of that -- and some of that does come from fair value adjustments that we made on the deposit side. If you look at Jacks Bank standalone say third and fourth quarter of last year, you'll see cost of fund significantly higher than what we're going to be showing. We -- on our fair value adjustment, we got their cost of funds down to about our level.

Okay, and then if I get specific on the Jacksonville MSA for your operation, how often do you have clients where you can play bigger as a lender? And how long will it take that to sort of fully get played out? Is that a six or nine month process or it take longer than that? I was just curious on the kind of upside of that and how long it takes?

Chris, I'm not quite sure how to answer that, except that it started on day one. Clearly the first place to look, when we trying to grow earning assets is more capacity for really good customers that they had. And we've already begin that. How long it takes, I mean, we start immediately but clearly it takes more than six months for some and less for others. But I expect, and of course we didn't model any of that. But I expect that there will pretty significant additions for this year.

And Chris, we've been calling, really since we announced the deals last year, and knew we were going to have liquidity, one of the things we have said, not indirectly how I did it, lower -- us going out to the market with lower rates expecting to get higher levels of volumes and all that's happened. We've been calling on larger customers really for more than a year and especially here in Jacksonville.

Great, and Dennis, one other question to your point earlier about sort of digesting trade fully. What do you think that means going forward? I mean do you expect that you will see more volume as a result that you'll be able to turn through that at faster clip. And also how does that sort of turn time kind of compare as you build the mortgage company in the past years.

The 15 day, we've built the business -- we have built our business primarily by selling to realtors and builders, more so than just sort of selling on right [ph]. So I would tell you, we our mortgage president calls as much on builders and realtors as he does mortgage bankers. But the fact that we're able to close so reliably, we say we are going to close 95% within 30 days. And the fact that we've got it back down to 15 days which is really what we target, is --it is a real advantage, especially with higher volume mortgage producers who are struggling in some of the bigger banks to get loans closed on time. So if that is -- given the way we run the business that's a major advantage for us. Trade probably calls us about a $0.25 million, once it's all said and done and we sharpen the pencil on what the fourth quarter, it probably calls us about a $0.25 million, on where we might have missed the cost of enterprise or something like that. And that cost has come down dramatically. The time to close has come down dramatically. I really credit the folks in the operations group, our mortgage team, does that, Chris, does that answer your question?

It does. Thanks for the color. Appreciate it.

The next question comes from Patrick O'Brien of Eaton Vance. Please go ahead.

Hi guys. I had most of my first question answered regarding the efficiency ratio. And you said it's below 60 by the end of the year. If you could, could you give a little more detail on how you get from here to there? What do you have to do to get there? And my second question has to do with the credit quality. How do you keep from going back to the bad old days where I've got five years in a row where you're provisioning greater than 100 basis points on loans? Is it going to be different next time, and if so why?

Okay, you take first one and I'll take the second one.

Patrick, first let me clarify below 60. My goal is get us to 60 basis -- to 60% operating efficiency before we go below that. But one of the -- again our goal has been to develop enough internal strategies. Some of them are only $25,000 a year strategies, some of them are $2 million strategies. That will let us hold the line on operating expense, and let us reap the rewards from the growth in revenue. And if you look back at sort of the internal message, I guess give you that, the internal message is that we are an industry leader on revenue growth. I don't know exactly what the number is, but it's probably 20% annualized growth over the last five years in revenue. And that, let's hold the line, let's figure out where we need to -- what resources we need to redeploy as opposed to being incremental. And so some of it is that. And there are, Ed's internal message is that we can actually go lower. Hold the line is good, but we can actually go lower. So I think the message I'd leave you with is more -- redeploy the existing resources and see the revenue growth that we expect to have push the -- push efficiency lower.

Okay.

And on the credit quality piece, I think the answer for us is better quality customers. And with that comes lower margins. But the back side of that is much lower credit charges. So that's what we've done in the last couple of years. We've also added a lot more credit support staff. So every loan is good when you book it. But then the follow-up is really, really important to see the yellow flags and the red flags and make adjustments and we've got more staff that will do that. So I think that is the key. We're still working on credit. We took the charge in the second quarter of last year and we gave guidance that we would be seeing more stability in our credit cost. And that we guided it would be 2.5 a quarter, and we've seen that three quarters in the row that it's been 2.5 or slightly less. So we expect that to continue and actually to get incrementally better as we go along. We're still trending down in non-performing assets. But we think we're in a pretty good place right now.

Patrick, one more thing, we would -- we'll revise the investor supplement that's in the 8-K in the next week or so. And it will have probably three or four more pages on loan diversification and concentrations, and some credit quality metrics. And I think you'll see, especially going back to 2007 much more diversified portfolio. So to reinforce what Ed was saying.

It will support the target mix that we have, and the fact that that the risk profile of the earnings assets is dramatically better than it was five or six years ago.

Okay, good, thank you.

The next question comes from Nancy Bush of NAB Research. Please go ahead.

Good morning, gentlemen. How are you?

Good morning, Nancy.

You -- Dennis you had mentioned that more assets, I think this is the quotation, more assets are going into the traditional commercial portfolio. Is there a sort of an ideal mix that you guys are thinking about and how do you see this migration into the commercial portfolio helping or hurting the margin?

Nancy, I think the -- well I see those cash flows come in mostly out of the purchase mortgage pools, which are yielding, at this quarter we're a little better than what we had forecasted, the cash flows were slower. But the 3%, I think those cash flows overtime will yield about 3% and so even in a lower for longer environment I think we’ll probably be able to stay somewhere in the 4.25% to 4.35%, 4.40% range on the commercial portfolio. That would be very ideal. What we have struggled as most banks have, we have the pace of pay-offs, especially in investor real estate. So it's really hard to keep some of these commercial assets on your book. I don’t think that’s going to persist forever, and so to degree that we’re able to see the growth in portfolio, you asked how long -- I think maybe a few basis points as we move through probably the next two years, a few basis points a quarter.

Okay. And Ed is there sort of an ideal loan mix overall not just for -- if things shift I guess how do you guys see the mix that really maximizes yield at your company?

I would tell you that between the investment portfolio, if I were to combine the investment portfolio and the purchase mortgage pools which we kind of see as the hybrid between bonds and…

Right.

That -- maybe I’ve got to see those hovering, staying somewhere, say 25% of total earning assets, and I don’t know what the percentage is now. No, it’s probably -- it would be higher than that. So probably coming down to 25%. Again we like the efficiency that we get from that concentration, for the efficiency ratio standpoint, but that’s not our true model. Our true model is banking the local community and managing the normal commercial portfolio.

Okay, the other question is -- I mean we’ve heard a couple of banks now and doesn't seem to be an overwhelming trend, but we're hearing refis mentioned again that there seems to be sort of a building trend of refi out there. I don't know if that’s just seasonal or a response to the rate environment or whatever. Are you guys seeing that, and is there any danger to your existing portfolio, if we start that again?

I don’t know that we ever -- I mean we’ve seen that for quite a while, and that’s been the challenge to growing the balance sheet is you add $5 of production and you grow $1 in balances. It’s been -- and that’s what Dennis was alluding to, it’s been really, being a real headwind.

Yeah. So you haven’t seen any greater amount of refi and right now than you’re seeing over the last few quarters?

I can’t see it increasing. I think the probability is higher that it would, to manage and steady [ph] growth at least for us.

It’s been pretty fast like cap rates are so low that virtually any real estate investor is probably wanting to take advantage of it if they could.

Okay, all right. Thank you.

All right.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Zember for any closing remarks.

Thank you again for everybody that’s joined the call. If you have any follow-up questions or comments, please feel free to reach out to myself or Ed, and we’ll do our best to answer your questions. Thank you. Have a good weekend.

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