Ameris Bancorp (ABCB) 2016 Q1 法說會逐字稿

Good morning and welcome to the Ameris Bancorp's first-quarter financial results conference call.

(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, Aronson, and thank you to all of you for joining us today on the call. During the call, we will be referencing the press release in 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 & 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 risk and uncertainty.

The actual results could vary materially. We will have 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 may be 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 in our GAAP financial measures in the appendix to our presentation. And with that, I will turn it over 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 acquisition of Jacksonville Bancorp.

First of 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 exclude the cost associated with the merger of Jacksonville Bancorp, which totaled $4.1 million after tax. These amounts include investment banker and attorney fees, severance cost, associated with the integration of the back office functions, lease termination cost and other miscellaneous cost.

We believe we have fully recognized the integration costs associated with Jacksonville Bank, and we don't anticipate any material amounts in future quarters associated with this transaction. But including the merger cost, 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 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 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 the model that will deliver top quartile results in extended low interest rate environment.

Some details about our earnings components, 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 of 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 a few minutes and discuss in more detail some of the moving parts there.

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 at 38% over the first quarter 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 velocity 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 MNs 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 we'll have additional improvement in efficiency levels throughout 2016.

The first quarter is normally a seasonally slow quarter for us, but we've 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 grew 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 loans 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 are serious about building tangible book value through our earnings and protecting it to our M&A transactions. We had no surprises on the Jacksonville Bank closings, we closed with more loans and deposits then 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, and are really key market for us. Our primary 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 are 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 and sentiment as we have moved through the first quarter. We are going to remain disciplined in the pursuit of 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 5 basis points from the link quarter. We had accretion income of $2.9 million in both quarters, so putting that aside, our margin increased from $374 million 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 than how it turned out. Short-term assets averaged just over 4% of earning asset. As we go into the second quarter short-term assets stand at just below 2% of earning assets, which should give us about 5 to 7 basis points of additional margin.

We do see incremental production on new loans, if 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 in some of the forecast we had made when we announced the deals 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've produced, has increased by 30% when compared to that same quarter. Over time we are confident we're going to see more assets concentrated in our traditional commercial portfolio, so I believe there's still some margin to be gained in the coming year, so even in a lower-for-longer 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 in our 2016 that net income forecast for mortgage. Additionally, we had just about mastered TRID at this point in 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 accreting efforts with new bankers.

SBA income, again 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're down a couple of a 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, that 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 us tight up on 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 JaxBank's expense are in our numbers, given that we closed in early March. Aside from that, we would've reported flat expense levels, and 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 branches yet to close. We have restructured the banks 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 we've 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 JaxBank 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 JaxBank going into the fourth quarter of this year.

And with that, Aronson, and I'll turn it back over to you for questions.

(Operator Instructions)

Tyler Stafford, Stephens.

Hey. Good morning, guys

Good morning, Tyler.

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

I would characterize M&A similar to the way I have for a while now. There's a lot of activity, there's a lot of conversation, there's a lot of relationship building, among all sizes of banks. And there's the timing issues that you typically deal with. The way we approach it is, we are $6.1 billion or so, and we are in the sweet spot for profitability, from $6 billion to $10 billion, so we don't want to be in a position to motor 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 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

Geography, US 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. Well, let's see, I've covered them all.

Okay.

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

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

An annualized number.

Okay. Got it.

And then last one for me, any outlook on the tax rate? It was a little bit heavy this quarter.

It was heavier this quarter. 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 is about 33.6%, I think. I don't think it's going to go up, but I think probably what we reported this quarter is more in line with what will happen till we get some effective strategies.

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

All right. Thank you.

Casey Orr, Sandler O'Neill.

Good morning

Good morning, Casey.

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 355 last quarter to 410 this quarter, which strikes me as a pretty healthy jump.

Some of it was the -- we were almost 100% hedged; generally, we're not; we only hedge about probably 85% or 90%. So we're almost 100% hedged. The fall in the interest rate -- there was some gain that we picked up from that, as well.

Okay, great.

And then I just wanted to add on to the earlier question about expenses. Can we quantify how much you expect to save from the branch closures and the other moves you mentioned earlier, when we put that against the $3 million or less than Jacksonville expenses coming on? Where should we expect quarterly expenses to flesh out of the back half of the year?

We had been forecasting operating expenses probably in about the $48.5 million range. We were probably a few hundred-thousand over that when you normalize what JaxBank added in the quarter. I think what the -- 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. And I think once we get JaxBank modeled in, probably we'll 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 putting it all together, are you still pretty confident you'll be running with the 60% or below efficiency ratio by the end of this year?

Ed is shaking his head, yes. Yes. Yes. We are -- I'm not sure about this.

Casey, we're trending down. We were at 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 and fourth quarter. And what we think is the fourth quarter of the year we should be operating in that 60%, 61% range.

All right, great, that's helpful. Have a great quarter. Thanks

Thank you.

Christopher Marinac, FIG Partners.

Good morning.

Dennis, if you had JaxB for the whole quarter, would the core margin have been higher or lower from what we saw in the release?

Maybe a tick higher. Given, especially given that we're -- I'm looking at margin without accretion at 380. We're modeling a higher margin for JaxBank than that, and some of that does come from fair value adjustments that we made on their deposit side. If you look at JaxBank, standalone, say, third and fourth quarter of last year you'll see [costs have flown] significantly higher than what we're going to be showing. We tone our fair value adjustment, we've got their cost of funds down to about our level.

Okay. And then, if I could 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 fully get played out? Is that a six- or nine-month process, or will it take longer than that? I was just curious on the upside of that in 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 you're trying to grow earning assets is more capacity for really good customers that they had, and we've already begun that. How long it takes -- I mean, you 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 it to be 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 had said, not indirectly highlighted it, lower -- us going out to the market with lower rate, 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 the adjusting TRID fully -- what do you think that means going forward? Do you expect that you'll see more volume as a result of your being able to turn through that faster clip? And also, how does that turn time compare as you've built a mortgage company in past years?

The 15-day, we've built the business -- we've built our business primarily by selling to realtors and builders, more so than just selling on rate. So I would tell you 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're 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, 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, that is, given the way we run the business, that's a major advantage for us.

TRID probably costs us about $250,000 once it was all said and done and we sharpened the pencil on what the fourth quarter -- it probably cost us about $250,000 on where we might've missed the cost of an appraisal or something like that, and that cost has come down dramatically. The time to close has come down dramatically, and I really credit the folks in the operations group, our mortgage team.

Chris, does that answer your question?

It does. Thanks for the color, I appreciate it.

Patrick O'Brien, Eaton Vance

Hey, 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?

Let me answer the first one, and you can answer the second one.

Patrick, first let me clarify below 60%. My goal is to get us to 60% operating efficiency before we go below that. But, 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 growth and revenue. And if you look back at the internal message, 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 what resources we need to redeploy, as opposed to being incremental. And so some of it is that.

Now 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 efficiency lower.

On the credit quality piece, I think the answer for us is better quality customers. And with that comes lower margins, but the backside 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 are still working on credit, we took the charge in the second quarter last year and we gave guidance that we'd be seeing more stability in our credit cost, and that we got it, it would be $2.5 million a quarter. And we've seen that three quarters in a row that it's been $2.5 million or slightly less, and we expect that to continue, and actually to get incrementally better as we go along. We're still trending down in nonperforming assets, but we think we're in a pretty good place right now.

Patrick, one more thing -- 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, a much more diversified portfolio -- to reinforce what Ed was saying.

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

Okay, good. Thank you.

Nancy Bush, NAB Research

Good morning, gentlemen. How are 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, and I see those cash flows come in mostly out of the purchase mortgage pools, which are yielding at this quarter were a little better than what we had forecasted. The cash flows were slower. But the 3% -- I think those cash flows over time 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 $425 million to $435 million or $440 million range on the commercial portfolio.

Now, that would be very ideal. What we have struggled, as most banks have, with the pace of payoffs, especially in investor real estate, so it's really hard to keep some of these commercial assets on your books. I don't think that's going to persist forever. And so to the degree that we're able to see the growth and 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 is there an ideal loan mix overall? Not just for -- as things shift, 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 purchased mortgage pools, which we kind of see as a hybrid between bonds and -- maybe I could see those hovering, staying somewhere, say, 25% of total earning assets. And I don't know what the percentage is now, I know it probably 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 a normal commercial portfolio.

The other question is, we've heard a couple of banks now, and it doesn't seem to be an overwhelming trend, but we are hearing refis mentioned again; that there seems to be sort of a building trend of refi-ing out there. And 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 a challenge to grow in 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 a real headwind.

You haven't seen any greater amount of refi 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 diminish instead of grow, at least for us.

It's been pretty fast-paced. 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.