Ameris Bancorp (ABCB) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Ameris Bancorp fourth-quarter 2015 financial results conference call.

(Operator Instructions)

Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Dennis Zember, Executive Vice President and Chief Financial Officer. Sir, please go ahead.

Thank you, Jamie, and thanks to all of you for joining us today on the call. During the call, we will be referencing the press release and financial highlights 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 today and available after our prepared comments to answer any specific questions.

Before we begin, I'll remind you that our comments may include forward-looking statements. These statements are subjects to risks and uncertainties. The actual results could vary materially. We list some of the factors that might cause the results to differ 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 statement as a result of new information, early developments or otherwise, except as may be required by law.

During the call, we will 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.

And I'll turn it over now to Ed Hortman.

Thank you, Dennis. Good morning, everyone, and thank you for joining our fourth quarter earnings call. I will highlight a few items on our quarter and year-to-date results, provide an update on our recent acquisitions, and make a few comments about M&A activity.

First about the results, we're reporting operating earnings of $0.47 per share, up 21% from the $0.39 per share we reported in the same quarter in 2014. Total operating earnings for the quarter were $15.3 million, which is an increase of 44% from the fourth quarter in 2014. Of course, earnings-per-share growth is less than the growth in nominal earnings, because of the additional 5.3 million shares we issued in the first quarter of 2015. Actual reported earnings for the quarter came in at $14.1 million or $0.43 per share, compared to $10.6 million or $0.39 per share in the same quarter a year ago.

Our operating results for the quarter exclude some acquisition costs associated with the upcoming Jacksonville Bank merger, as well as some costs associated with the recent conversion of M&S Bank and Bank of America. Costs associated with the Jacksonville Bank are centered mostly on legal fees, while the remainder were related to conversion and system costs as well as additional severance costs that we incurred. We had some other nonrecurring amounts that we'll touch on a little later as well that are important to note as we look forward into 2016. For the year, our operating earnings were $53.4 million or $1.66 per share, compared to $41.2 million or $1.57 per share in 2014. Actual reported earnings, which include the nonrecurring charges, were $40.8 million in 2015 compared to $38.4 million in 2014.

We saw a modest improvement in our operating return on average assets and tangible equity for both the quarter and the year. For the quarter, our operating return on average assets was 1.12% compared to 1.04% for the same quarter in 2014. For the year, our operating return on assets improved 1 basis point to 1.11% compared to 2014. Our operating return on tangible capital for the year-to-date period was 13.7%, compared to 15.2% in 2014. Our 2015 ROTCE was impacted by the first quarter capital raise that wasn't fully deployed until later in the year. I expect the 2016 operating ratios to be stronger, due to the fact that we ended the year with high excess liquidity almost fully deployed.

Net interest income on a tax equivalent basis improved to $49.4 million in the quarter, compared to $48.1 million in the third quarter of 2015. Loan growth in the quarter came in at around 7.5% annualized, which was slower than normal due to seasonal payoffs in agriculture. For the year, we had organic loan growth of about 13.4% or $344 million, which did beat our initial forecast. In addition to the organic growth, we added $592 million of variable rate mortgage loans with short durations as an investment vehicle for the extra liquidity that we picked up in our mid-year acquisitions.

For the year, including covered loan runoff, acquisition activity and the purchased mortgage pools, we grew loans by $1.1 billion. I think it's important to note, too, that we funded 45% of that growth in loans with growth in non interest bearing checking accounts. And in addition to the $490 million of checking account growth, we grew $511 million. And now in savings accounts, while not interest bearing, they're not very rate sensitive. Essentially, with just over $1 billion dollars of growth in low cost non rate sensitive deposits, we funded 91% of our record loan growth in a manner that materially improves our sensitivity to rates and long-term profitability.

Net income from our mortgage and warehouse lending divisions fell $1.2 million in the quarter, which was about $0.04 a share. We did experience some higher costs associated with TRID and some slowdowns in closings for our customers, but the majority of the revenue decline was just seasonal. I fully anticipate that mortgage will grow in 2016 relative to what we experienced in 2015, and we're budgeting a double-digit improvement in net income from these divisions. And even in the event of higher rates, I believe our referral networks that focus on purchased business will allow for us to achieve our budgeted improvement there.

On the expense front, we reported operating expenses of $51.2 million net of acquisition-oriented costs, compared to $41.6 million for the same quarter 2014. This 23% growth rate in operating expenses compares favorably to the 38% growth rate in total assets, despite some nonrecurring items in our fourth quarter expenses. Salaries and benefits increased approximately $1 million, due almost entirely to $1.3 million in higher incentive accruals that should moderate back in the first quarter of 2016. Credit resolution costs were higher in the fourth quarter at $2.2 million, compared to $1.1 million in the third quarter.

During the fourth quarter we expensed approximately $800,000 associated with an auction of loss share properties and loss share agreements that expired at the end of the year. Additionally in the quarter, we incurred a final amortization of about $1.6 million associated with our largest group of FDIC acquisitions. Our scheduled amortization is about $800,000 in the first and second quarter of 2016, and then about $150,000 in the last two quarters of the year.

Looking at credit quality for a loan, I'd point out that we finished the year with about $60.7 million in non performing assets. And that includes $7.1 million that we reclassified on December 31, 2015, that was associated with the expiring loss share agreements. Excluding that reclassification, we reduced nominal levels of non performing assets by $36 million or 40% when compared to December 31, 2014, and we reduced NPAs to total assets from 2.2% of total assets at the beginning of the year to 0.96% at the end of the year. I'm very pleased with the improvement we made in credit quality, and believe the charge we took in the second quarter was a good timely decision. Even with the extra costs associated with loss share into auction in the fourth quarter, we recorded total credit costs in the second half of the year of $4.8 million, which I believe is sustainable going into 2016.

The last item on the results, I would highlight capital levels and tangible book value. We had a lot of moving parts with the capital raise and almost 40% growth in the balance sheet, but we finished the year with 7.44% tangible common equity to tangible assets. Each year end, we do see liquidity spike with some of our municipal and corporate relationships, and we estimate our impact on total assets in 2015 was about $200 million in the fourth quarter. I see our capital levels normalizing very shortly to the 7.75% area, and believe we will be over 8% by the middle of 2016. Tangible book value increased 15% during 2015 to $12.65. About 65% of this increase came from earnings less dividends, and the remainder resulted from the first quarter capital raise.

Only M&A front, we're working through the final stages of the Jacksonville Bancorp deal. We currently have all our regulatory approvals, and anticipate it closing in the first quarter of 2016 and a conversion later in May of this year. We're still having M&A conversations, but obviously, the pullback in bank stocks and the environment we're in has us recalibrating offer prices and strategies. I've said it before and I'll say it again today, our first priority and focus should be on our core operating machine. The smooth integration of Jacksonville Bank, the improvement in our operating costs, and focus on our core organic growth are the keys to successful results for us in 2016. We're confident there will be opportunities for M&A, but we will remain disciplined and strategic with anything that we would announce.

With that, I'll turn it back over to Dennis for a few more comments on the 2016 results. Dennis?

Thank you, Ed.

Our margin for the fourth quarter came in at 3.98%, which was down about 9 basis points from the 4.07% we reported in the third quarter of 2015. When you exclude the effect of accretion, our margin declined to 3.74% compared to 3.81% in the third quarter. This decline is completely attributable to the year-end liquidity that we see from the large municipal and corporate relationships Ed talked about. Normalizing those levels of short-term assets in our earning asset mix moves the margin a couple basis points higher than what we saw in the third quarter of 2015. When you look out into the first quarter with the difference between ending loans and average loans, I expect our margin to be a few basis points higher, probably in the 3.85% range.

A little bit of color on loan yields and loan growth. On loan yields, the yield on legacy loans declined to 4.74% during the current quarter from 4.86% in the prior quarter. A higher portion of our production was variable in the fourth quarter, and about 25% of the growth in the quarter came from our efforts on municipal lending. Steady levels of accretion income on lower levels of purchased loans increased their combined yields to 6.65% from 6.09% in the prior quarter.

Lastly, the yield on purchased mortgage pools came in at 2.92% in the fourth quarter, which was slightly lower than where we had forecasted due to faster prepay. This portfolio's cash flows in the fourth quarter came in at around a 21 or 22 CPR with a 2 1/2 year average life. We initially modeled a 15 CPR and a 3 1/2 year average life that would have yielded about 3.15%. Six months into this strategy, I would tell you that we're really pleased with this portfolio from the credit and yield perspective. Especially when we still see investment portfolio options easily 100 to 150 basis points lower for the same average life.

Let me make a point of clarification about loan growth. Ed mentioned a 13.5% growth rate in organic loans. When we say organic loans, we're looking only at loans and purchased non-covered loans. For 2015, purchased non-covered loans includes approximately $195 million of loans that we acquired in the Bank of America and Merchants & Southern transaction, as well as about $76 million of loans that we reclassed from covered status into purchased non covered status upon the expiration of those loss share agreements. So when you exclude those two amounts, we get 13.4% loan growth. So those amounts have been excluded to calculate that.

When we announced the deals a year ago, we indicated that we would look to be more competitive on yields and begin increasing our organic growth rate from about 10% up to 15% in order to deploy the funds into commercial assets over a few years. Our loan yields have come in slightly during the year, and I feel like we are starting 2016 with enough momentum on the loan side to sustain the kind of annual growth rate that we had in 2015.

For the year of 2015, our organic loan growth was split evenly between municipal lending, mortgage, and commercial. Our mortgage growth was about 50% portfolio lending, and about 50% growth in warehouse lending. In the fourth quarter, loan production totaled $302 million versus $287 million in the prior quarter. Yields on loan production came in at 4.47% for the fourth quarter, down about 12 basis points from where we were in the third quarter of 2015.

Now with that, I'll turn it back over to the moderator for any Q&A.

(Operator Instructions)

And our first question comes from Frank Barlow from KBW. Please go ahead with your question.

Good morning.

Morning, Frank.

My first question is about the core expense run rate. So it was about $51 million this quarter, but if you back out some incentive accruals, some OREO costs how should we be thinking about the core expense run rate from here, obviously not including the JAXB deal?

The items Ed mentioned, there are a few other items, smaller items, but about $2.5 million. Between incentives and the FDIC coming down, some marketing costs including normalizing credit back to the $2.5 million range that Ed had mentioned. You get that it's $2.5 million to $2.75 million of items.

Okay. And I saw you all mentioned TRID, can you quantify exactly how much cost that had in the quarter?

What our Mortgage President tells us is that the way TRID affected us is it took -- we went from say 30 minutes to draw -- it took us about 30 minutes to draw our closing package to about an hour and a half to draw a closing package. And a lot of that was handled with overtime, so maybe $100,000 to $200,000 of extra costs between our personnel and reengineering some of the processes.

Okay.

And back to what Ed said, it's not -- we don't -- all that's fixed and adjusted right now. It's definitely more cumbersome and labor intensive, but that's not a driver on the bottom line.

Okay. And is any of that recurring, or should that come out next quarter?

The majority of that should come out next quarter.

Okay. And then as far as the tax rate goes, I saw it was 19%. Was there anything unusual there?

Unfortunately, yes, I wish we could maintain that. But the over accrual on taxes, that stems mostly from M&A adjustments, was about $1.4 million.

Okay. So the 32% tax rate is probably still the right one?

Yes.

Okay. Perfect. Thank you.

All right.

Our next question comes from Tyler Stafford from Stephens. Please go ahead with your question.

Hi, good morning, guys.

Hi, Tyler.

Good morning.

Maybe to follow up on Frank's question on expenses. Can you remind us what we should expect to see with the branch closures that I believe happened the last couple quarters or months?

When those should start to show up, the amount of those savings? And then just remind us of the JAXB cost savings and the timing you expect to see those as well.

Tyler, I'll let Dennis quantify that. But just remember on the branch closings, when we had adjoining -- basically adjoining branches in four or five instances we did have to do some remodeling expense and retro fitting to accommodate the larger branch size. So that has taken some time, and in fact, we've still got two that are in process that should be completed by the end of the first quarter, the early second quarter.

The savings that we're expecting from that, about $4 million annually, there was 10 branches initially, it's 11 now. The 11th branch wasn't very costly, but about $4 million annually.

And I -- you'll probably see -- so the $1 million a quarter, you'll probably see about half of one quarter, maybe $0.5 million in the first quarter. And then essentially all of the branches should be closed early in the second quarter, and you'd see the full run rate, almost the full run rate in the second, third, and fourth quarter.

And then we should start to see the JAXB cost savings beginning to fall out after the second quarter with the system's conversion?

You'd probably -- yes, given that the system's conversion is scheduled for around May 20. Normally, we carry the costs for another month or so. So I think probably the third quarter you'd see the majority of the cost saves.

Okay. So if we think about the expense items that could fall out with the cost savings and then maybe a normalization a little bit on this income side within mortgage, any outlook on where the efficiency ratio could trend towards the back half of this year?

Yes, Tyler, we're hesitant to say, but let me say it this way. We are absolutely focused on reducing operating costs and expenses. We are also absolutely focused on making sure we have the right staff and the right processes in place so we have the opportunity to do more M&A.

But we would expect our efficiency ratio to average for the year, at worst, in the low 60%s. It will be approaching 60% by the end of the year.

Okay. That's helpful. And then if I can sneak one more in, just, Dennis, on the NIM outlook, I appreciate it for the first quarter. Any initial thoughts with JAXB folded into the mix how the margin can trend, I guess call it 2Q and beyond for the rest of 2016?

I think the margin should trend positively. I need to go back and recalibrate. I think JAX Bank -- we're below 4% now because of the concentration in investment securities and 3% loan pools.

I don't think we would end -- I'm confident we wouldn't end 2016 with the same mix of earning assets. I feel good it would be centered more on just traditional commercial assets.

That's got to be positive for the margin. But as far as quantifying it, I haven't done that yet.

Okay. That's fair. Thanks, guys, I appreciate it.

All right.

(Operator Instructions)

Our next question comes from Christopher Marinac from FIG Partners.

Thanks, good morning. Dennis and Ed, I noted the mention of other expenses in the press release. I just was curious if any -- and that's related to the FDIC loss share stuff, would any of those be added back in addition to how you calculated the operating earnings this quarter?

No, the items I mentioned, Chris, were not in the operating. The only items that were in the operating earnings were the merger costs that Ed talked about.

Okay. But are some of those other expenses one time in nature or perhaps not coming back because the pools are going away?

They're one time not coming back.

Okay. But we also could reduce those from the expense base in addition to what you've done on the operating calculation, that was my question.

Yes, yes, I'm sorry.

That's okay. All right, perfect. And then I guess more of a bigger picture question.

So looking at the core ROA this quarter, I think it's around 1.10% -ish or so on the operating number. To what extent do you have goals to be bigger than that as this year shapes up?

And I guess I'm just trying to quantify if there's a minimum ROA that you really strive for. I know certain quarters can be better than others with the mortgage piece. But just in a big picture, curious on your goal as you march the organization forward.

That's a good question. The first thing I'd say is, we want the number to be consistent and to be less noisy. And when I say noisy, Ed talked about the 1.11% ROA, the operating ROA. Our actual ROA with everything included was 85 basis points, and that included 33 basis points of credit resolution costs and merger costs. And look at where we're going into 2016 on credit compared to where it was a year ago. It's completely a different story.

So I expect a good bit of the noise that came from credit and that separated our operating ROA from our real ROA to go away. We think credit costs should moderate to be virtually nothing, and merger costs, those will go away when we quit doing M&A. But just excluding that, we should be somewhere in the 1.15% ROA I think as a minimum.

And Ed and I feel like we should be with mortgage and SBA doing what we think they can do and the contribution they give us, we should be somewhere in the 1.25% range, but 1.15%, you asked about the minimum. I'd -- given what credit and merger costs did this year to the ROA, I'd say 1.15%.

Great, Dennis, that's very helpful. Thank you for the background here.

All right.

Our next question comes from Peyton Green from Piper Jaffray. Please go ahead with your question.

Hello, good morning. I was just wondering, Dennis, with there being a little margin pressure and the outlook with the lower for longer environment, even if there is little mix changes that there will still be some margin pressure. When does the expense to asset ratio start to come down?

I guess just in looking at the last three years and taking a less 90 day approach to this. But it's basically been 4% or above for the last three years, and there really hasn't been any leverage to the near doubling in the balance sheet size over that time.

I was just wondering, maybe if you can give a little bit more of a sense of when you might see some real leverage on that. Because it would seem very important to getting the ROA up in addition to the revenue growth. But the expense number would seem to have to come down at some point.

Peyton, that's a good question. I don't really look at expenses to total assets, I'm really looking more at a net overhead ratio when you combine the two. But still to your point, that number has been high, been right under 200 basis points.

We feel like the number should be in the 160 basis point range. So there's -- that's 30 basis points between more revenues or less expenses that we need to be rationing out. So to Ed's point, we still feel like there's an expense lever here that we can pull.

It does feel elusive, but a lot of that has to do with constantly doing M&A. Constantly shuffling people in and out and reengineering for a larger bank, and things that we've talked about before. But I believe, getting to Ed's number in the low 60%s, I believe -- for us to get there, Peyton, you would see the leverage you're talking about.

Okay. And is that an important goal for 2016, or is that like last year when we've talked (multiple speakers) -- it just seems to not show up.

I understand. It's one of -- that's one of Ed's three. And I'll make one more comment and Ed may say something.

You can be more specific. It's the second of my three.

Second of his three.

The smooth transition and integration of Jacksonville Bank is clearly on us and is critical. But it's absolutely important, Peyton. And I think to Dennis' point as we build up overhead, we grew 40% and we were investing still in overhead.

And looking at our foundation now, I think we probably have one position gap that we need to fill, which is not significant. So it should in 2016 -- it's absolutely focus, and we should see some improvement.

And you and I think have talked about this before. We've not had organic growth in the balance sheet. We've added most -- almost all of our growth seems to come from M&A.

That's changing now, especially with covered loans pretty much having -- covered loan runoff being what negates organic growth, but that's covered loans into the year at only $130 million. So that's not going to be a factor going into next year.

We had record 13.5% organic growth in loans. I think that, plus where covered loans ended the year, I think you'll see you'll see -- start to see some of what you're asking for.

And more importantly, I think if you look at asset quality, if you look at our balance sheet risk, we've made tremendous strides in reducing our risk in our balance sheet. And obviously, the covered loans continued to diminish. And so it's expenses associated with that will diminish on a pro rata basis or more. So I think until there's more M&A, I think most of the noise will be out of our store.

Okay. All right. And how do you think about -- the stock is seeing a little adverse reaction to the results. How do you think about the overall stock valuation versus an M&A transaction?

It clearly plays a role. If you're going to use your stock as consideration, which we would typically do. So it absolutely will have an impact.

And I think if you look at the overall the economy and the uncertainty and the volatility, I think it's going to give some people some pause. But at the end of the day, we're pretty damn excited about 2016 and what we're going to be able to achieve. And I think any pullback is going to be short lived.

So I could, obviously, be wrong. I'm focused on results, not stock price. But we do need for that to come back to give us an advantage that we've enjoyed up to this point.

Okay. All right, great. And then, Dennis, last question, the average fed funds and interest bearing deposits in banks was about $300 million over the course of the quarter. But is there a target level for that going forward as a percent of assets, earning assets, or just an absolute level?

It's very low, like 1.5% or 2%. We don't feel like we need to have a lot there, given the position in investment securities; and really that's high, $200 million high because of the tax commissioner accounts and some of the other municipal and corporate accounts we've had. A good bit of that is already moderated off the balance sheet today.

Okay. So that should be out of the way in the first quarter.

Yes.

Okay. Great. Thank you. All right.

Good deal.

Our next question comes from Nancy Bush from NAB research. Please go ahead with your question.

Hello, good morning. I've got one small picture question and one big picture question. I'll ask the small picture first, and that's if you could just go back to the mortgage warehouse results for the quarter, and I think you said you were looking for double-digit improvement in 2016.

I don't know if that's just in the warehouse or in the mortgage business overall. But could you just tell us your assumptions behind that?

On -- well, we're talking about -- I'm combining both of those, Nancy, mortgage warehouse and retail. Our assumptions behind that have to do with just where we see production, and what we -- again, short of a recession, I believe we'll be highly successful -- I believe we'll continue to be highly successful in mortgage.

We ended the year -- we added a couple more teams on the retail mortgage side. We've added some new customers, larger customers, on the warehouse lending side.

Right.

The fourth quarter, we were still pretty active in the fourth quarter. When you look at the revenues, it -- especially on the retail side, it doesn't show it. But from a hiring standpoint, new construction customers we signed up, new real estate agents that we had a new relationship. I just feel confident that that's not going to be an area of disappointment next year.

Okay. Well what happened in the warehouse in the fourth quarter? If you could just -- I was writing very rapidly here, and my notes are not very good. So if you could just tell us what happened.

Okay. On warehouse lending, revenues on net interest income it's mostly -- it just has lower levels of production of loans going through there. And that just -- we have -- I'm not sure, I think we probably -- I don't know how many customers. We have customers in 27 states, mortgage broker customers in 27 states.

Right.

And they experienced the same thing in their mortgage business that we experienced in ours. That's why I lumped them together.

So it's just more or less seasonal?

Yes.

Okay. And the big picture question is this. As I recall, in the third quarter earnings call you talked a lot about predictability and less volatility in your earnings being something you foresaw for the future. And that would be additive to your stock price, et cetera, et cetera.

So given that you've got JAX coming and you've got some other things going on, are we there yet I guess is my question? Are we at that point of greater predictability? Are we going to get there in 2016, and even with all the deal activity going on around you?

Nancy, I think the -- one of the larger pieces of that would be credit, and we clearly think that's behind us. The credit costs, we got it to $2.5 million a quarter at mid year last year, and we actually did slightly better than that in the second half of 2015, even with the auction costs and the covered loans that we exited and loss share agreements that we exited. So we're really confident about 2016 on the credit cost piece.

Okay.

So yes, I think we're convinced that volatility is behind us. From an M&A perspective, Jacksonville Bank, that noise is not going to be substantial. But there will be some noise from that in the first two quarters, but not significant.

Okay.

And organic growth, and I'm going back to Peyton's earlier question. Organic growth with a more steady level of operating expenses, which we don't feel like we -- Ed made this comment either, we don't feel like we need -- there's no resource demand out there for new production. So I feel like we can get better production and more balance sheet growth with existing resources is going to help us on that.

Okay. All right. Thank you.

All right.

And, ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference back over to management for any closing remarks.

Okay. No closing remarks, but thank you for joining the call and call us with any questions or comments. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.