Ameris Bancorp (ABCB) 2015 Q2 法說會逐字稿

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 for all -- thank you all for joining us today on the call. During the call today, we'll be referencing the slides 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 uncertainty, 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 may be required by law.

During the call, we'll also discuss certain non-GAAP financial measures in reference to the Company's performance. You may 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 a charge against other real estate and problem 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 to 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.

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 will little benefit from fee income.

Going forward, we expect about a $3.5 million lift, beginning in the third quarter in additional fee income, and a little higher than that after we finish 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 line of business side. This represented about 55% of incremental revenue from the line of business, so, that was accretive to our efficiency ratio.

As I mentioned earlier, we took a 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 very deliberate with asset dispositions and maximize the price on each piece of other real estate sold as compared to a 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 selective 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 peer multiple on our earnings lies in 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 25th 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 25%, 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 Dennis now to go through some of the slides and discuss the financial results in a little more detail for the quarter. Dennis?

Thank you, 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 mentioned, and to recap we took a charge for M&A costs of $3.7 million or $0.11 per share, and a charge to aggressively write down REO 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 earnings assets, offset somewhat by margin compression, as well as from the acquisition of Coastal Bank in June of 2014. Non-interest income growth continued to be noteworthy 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 the current trend -- I'll discuss current trends against the first quarter of this year in more detail, but this year-over-year growth comes from the Coastal acquisition. It comes from growth in the line of business expenses, and some amounts spent getting ready for the recently closed acquisitions.

I'm on slide 5 now where we've projected our total revenue for the next couple quarters. These projections exclude any accretion income, which for the second quarter was $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 forecasts hinge on our ability to better allocate the $1 billion -- $1 billion or so growth in earning assets 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 not 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 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 -- which lead us to remain positive about what their contribution will be for the second half of the year.

Slide 7 shows operating expenses at the bank were tame, 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 the 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 to have completed before the end of 2015. This savings, along with the higher yields we're seeing on the liquidity deployment strategy, will more than offset the lost revenue from the deposit runoff we had, and, as Ed said earlier, allow us to hit the targets we projected.

Let's skip to slide 9 to 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 improvement in the coming quarters from the acquisitions and it was time to take this charge and be in a better position to deliver consistency in our results.

We've looked at our spend level, 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.

And just a couple 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 has its strongest pipeline yet going into the third quarter.

Also during the quarter, we picked up about $192 million of loans from the Merchants & Southern acquisition, and about $269 million in purchased mortgage pools.

Slide 11 provides a little more detail on the purchased mortgage pools that we've added. Essentially, what we've done is look for certain types of mortgage pools that have about a three-year duration and what we consider to be good credit metrics. The three pools we added in the second quarter have original loan-to-value 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 mark-to-market hit that comes along with mortgage-backed securities. We are looking at some additional pools now that have pretty much the same characteristics we believe we can close before the end of the third quarter.

Skipping to slide 13, we note we came in slightly ahead of our forecasted accretion potential book value from the two deals and the capital raise, around 5%. The branch purchase transaction being smaller also benefited our leverage ratio, which shows 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 trade at a material discount to our peers on earnings, which, in our opinion, is due to the inconsistency of our results for 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 targets and an ROA and a return on tangible capital that should put us in the top quartile of our peer group.

Lastly, M&A is still a driver for us on earnings growth and activity is as good as we've seen it in the past. With the relationships we already have in place, we believe we can mostly avoid auctions and still succeed in this environment. Our recent deals have lower-than-normal execution risk and our capital and regulatory reputation do not pose any kind of roadblock to continued activity.

With that, I'll turn it back to the operator for questions.

Thank you. We will now begin the question-and-answer session. (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 cost 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 mark these NPAs down, 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're going to sell?

While, Dennis is look at the slide to give you that, I'll just tell you that the balances that we have are already marked-- were already marked at about 10% or 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 them moved out in the next two quarters.

And I think Dennis has that number now.

Yes. Brady, your -- you said $43 million, which is more of our legacy. We actually include the purchased-not-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.

Okay. And then -- 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?

The -- if you -- going off of our margin in the second quarter, and then adding in the new liquidity and the new earning assets, our target yield on the earning assets is around 3.15. I -- that was our target yield. With that, that took us to 3.70 in the third quarter, and probably 3.80 as we have better deployment in the fourth quarter. Now, again, that number does not include any accretion, which is still about 20 to 25 basis points.

Next year, Brady, I think there'll still be a little bit of compression, 10 -- I mean, probably 3.80, 3.85 for next year.

Okay. And you're talking about the margin there, not the -- just yield on earning assets?

No, 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, for next year, assuming -- again, I'm assuming rates never go up, and that we'd have -- continue to have a little bit of compression, we'd probably stay somewhere in that range.

Okay. And then the accretion -- you're running around $2.5 million, $3 million a quarter. What -- 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, that's -- 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 quarters.

Okay. Great, thank you.

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 to be -- how much -- how long is it going to take to get the sales done?

Yes, Nancy. The majority of the properties are coastal oriented, coastal Georgia, and sort of in the panhandle area, sort of south of Tallahassee, Crawfordville area is where the majority of the assets are, although there are some scattered all over.

The -- the assets that we wrote down we're already seeing good activity on. The values that we wrote these down to are -- some of these markets, it didn't really matter how low we wrote the property -- we wrote the value down to, there's just not that much activity.

Right.

The -- so, the values we went to on these were levels that we've been seeing from interested parties, although a lot of them are bottom fishers, so to speak.

Okay.

So.

Yes, are you guys going to be disposing of these yourselves, or are you going to be using outside brokers to do this, or how is that running?

We'll be doing it ourselves. Of course, we have all of the properties listed, but we will not using private equity or auction-style effort on most of this.

Okay. 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, how -- what assumptions are you making about deposit pricing in there?

Okay. And, Nancy, that's a good question. I didn't -- 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 accounts, savings accounts, and NOW accounts.

We're 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.

Right.

But these two deals and the short-term nature which we're deploying the liquidity has taken us to be slightly asset sensitive. We were slightly liability sensitive coming into these two deals, and a lot of that's the product of us having a lot more effort on fixed-rate lending, really what the 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'll take our next question, and that question is from Peyton Green with Piper Jaffray.

Yes. Good morning. Ed, I was wondering if 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're 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're going to see it. Our covered runoff is about what we expected it to be.

We did have a little over 15% organic growth in the second quarter, as you mentioned. About -- a big part of that is 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're getting the growth from. That's not changed. So, the larger MSA markets, like Charleston, Atlanta, Savannah, and Jacksonville.

Okay. And then, if you could talk just a little bit about competition, I mean, is there any expectation by the customer base that rates are going to lift a little bit from the Fed, or is it still more competitive in the margin? And maybe what your new loan yield was in the second quarter?

Well, Peyton, it's been competitive. It's still competitive, and it's going to be competitive. That's not going to change, and I think we win -- our company has won on relationship, and I think we'll continue to do that.

Having said that, when we look at our pipeline, we -- our closure rate on our pipeline is not what it was three years ago, and I don't -- that's probably to be expected to continue, which means we just have to work a little bit harder and get in front of more prospects. But we're pretty comfortable that we'll 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 for -- on new production about 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 our -- given the stronger push that we've had on production, especially with the liquidity, we're pleased with where we are on incremental pricing.

Okay, great. And then, Dennis, maybe speak to what your expectation is for earning asset growth in '16 versus '15? Is the thought that you'll use any organic loan growth to, basically, take advantage of any cash flow you might get from the securities book, or the loans that have been purchased? Just maybe help us with that.

That's a good question, because the way we're setting up the mortgage pools, which is where we're going to, probably, deploy at least half of the incremental liquidity or the liquidity, is -- we think there's going to be $125 million to $150 million of cash flows off of those, and that we'd be able to move that back into the commercial book. Long term, we're not trying to manage a larger book of mortgages, but we do think -- we do want to keep that cash flows coming in so that the balance sheet will look more traditional.

I guess the answer to your question is, I think it'll be more tame organic growth in earning assets next year, because it will still be some rebalancing. That being said, I mean, we're still growing deposits. The bank's -- Ed mentioned 15% loan growth, which was -- we were hoping to get to 15% sort of on a run rate by the end of this year, and we've been there, really, the first and second quarter.

So, I mean, we're still positive, but it will be more tame 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 an EPS basis it contributed $0.10 to earnings in 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. And 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-sell yields. We've got the majority of our producers substantially over our target monthly production goal. The open pipeline is as big as it's ever been. I mean, I -- at least for 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, I -- mortgage is going to grow a little. 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 profitable and on an upward slope.

SBA 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 a little more to the bottom line there. The pipeline on SBA is good, and the gain-on-sale percentages we're getting there is good, as well.

We are considering -- 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 might impact third and fourth quarter results in SBA.

You didn't speak to the fourth quarter mortgage, but, Peyton, we would expect fourth quarter -- the mortgage in the fourth quarter to be down a little bit like it typically is, every fourth quarter.

Yes, sure. No, great. And then -- well, last one, I promise.

Maybe thinking about kind of the overall bank's contribution to earnings, I mean, if you back out the one-timers, I mean, the earnings profile is still kind of flat, year over year. Ed, maybe talk about the goal in driving better earnings out of the bank to maybe offset mortgage over time, and SBA?

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

Okay --

I'm going to --

(Multiple speakers).

-- so do you expect more operating leverage going forward out of the bank versus not as pronounced in the past?

Yes.

And, Peyton, let me -- 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 -- I guess, really, going back to 2000 -- well, going back a long way, that our combined loan growth is going to be in double digits, and that includes covered loan runoff. And so, for the last couple years, we've produced $10 of new loans, and we've run off $10 of covered loans, or at least covered yield.

And -- and right now, if you look at the first half of the year, we're -- we're 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 incremental profitability to what the bank's doing, and it's going to increase the bank's kind of contribution, as well.

That -- I think you'd see mortgage and SBA, to close out this, mortgage and SBA will continue to grow, and they're important to us, and we like what they do for the return on assets and capital, but I think you're going to see the bank growing at a little faster pace, and the bank still is 80% or so of total results.

Okay, perfect. Thank you for taking my questions.

All right.

(Operator Instructions). This concludes our question-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.