Ameris Bancorp (ABCB) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Ameris Bancorp First Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Nicole Stokes, Chief Financial Officer. Please go ahead, ma'am.

Thank you, Racho, and thank you to all who have joined our call today. During the call, we will be referencing the press release and the financial highlights that are available on the Investor Relations section of our website at amerisbank.com.

I'm joined today by Ed Hortman, Executive Chairman, President and CEO of Ameris Bancorp; and Dennis Zember, Executive Vice President, Chief Operating Officer of Ameris Bank and CEO of Ameris Bank. Ed will make some opening comments about the quarter and our pending acquisitions. I will spend some time going over the details of our financial results, and then Dennis will provide closing remarks.

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'll list some of these factors that might cause 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 statements as a result of new information, early developments or otherwise, except as required by law.

Also during the call, we will discuss certain non-GAAP financial measures in reference to the company's performance. You can see our reconciliation of these measures and GAAP financial measures in the appendix to our presentation.

And with that, I'll turn it over to Ed Hortman for opening comments.

Thank you, Nicole, and good morning, everyone. I appreciate you taking the time this morning to join our first quarter 2018 earnings call. On the call today, as Nicole said, we'll discuss our earnings results and then I'll provide some insight into our M&A strategies and pending acquisitions.

For the first quarter, we're reporting operating earnings of $0.73 per share, which excludes about $1.1 million of after-tax merger and branch sale costs. Including these charges, we're reporting $26.7 million in net income or $0.70 per share.

Our operating ratios continue to be very strong. Our adjusted return on assets came in at 1.44% in the first quarter compared to 1.27% in the same quarter of 2017.

The change in the tax law added 17 basis points to the ROA this quarter. So on an apples-to-apples basis, our return on assets was comparable to first quarter of last year.

Dennis and Nicole did manage to squeak out an efficiency ratio just below 60%, which is excellent for the seasonally slow first quarter and it puts us in a position to achieve a mid-50s ratio later this year.

And lastly, our return on tangible common equity came in very strong at 17.09%, up from the 15.84% we reported in the first quarter last year. Our quarter was highlighted by few items that I believe point to the kind of year we're expecting.

First, we had solid loan growth for the first quarter, which is seasonally a weak quarter for us. This year, we had a little better than 10% organic growth in loans, which is ahead of the same quarter last year at 8.5%.

Secondly, we're reporting a seasonal decline in deposit balances. We're reporting that over the last year. We've grown deposits by almost $804 million and funded about 92% of our incremental loan growth with deposit growth.

Our pace of deposit growth and our successes continue to improve, and our pending mergers will put us in larger markets where we expect to solidify our pace of growth and funding.

And lastly, our marketing increased during the quarter by 2 basis points, excluding the effect of accretion income. Considering that we lost about 6 basis points of margin from the reset municipal loans and securities from the recent tax law, I'm delighted that we were able to overcome that and still post an improvement in the margin.

I can't brag on our bankers enough for what they're doing in the marketplace. The competitive pressures are stiff as we've seen in quite some time. But our folks continue to produce outstanding results on both growth and profitability. I'm really proud of these results and excited about the kind of year I think 2018 can be for Ameris Bank.

Nicole will talk more about our earnings for the quarter in a moment. So I'll shift to give you an update on our pending acquisitions. During the first quarter of 2018, we successfully completed the acquisition of the remaining 95.01% of US Premium Finance. We've retained the management team, and we continue to see solid growth in this division with exceptional credit quality and above average return on assets and efficiency ratio.

We believe that we should get approval on the ACFC transaction in Jacksonville any day now, and we're prepared to close right away. Our conversion for this transaction is scheduled for mid-June, and we're very excited about the bankers who are going to be joining us in Orlando, Tampa and here in Jacksonville.

And lastly, we just as excited about our pending acquisition with Hamilton State Bancshares in Atlanta and the boost to our Atlanta franchise that this acquisition will add. We still expect this acquisition to close early in the third quarter of this year, and we should be complete with the integration efforts shortly thereafter.

On additional acquisitions, we're continuing to have conversations on both the bank side and the non-bank side. I expect some of these conversations will continue throughout the year. And then as we close and integrate the 2 pending deals, we'll be ready to move ahead with something else, hopefully, along the lines that we've outlined on previous calls and previous one-on-one meetings.

So Nicole, I'll stop there and ask you to cover more of the financial details of the quarter, and then Dennis can share details on our outlook and strategy going forward.

Thank you. As Ed mentioned, we're reporting earnings of $0.70 per share and operating earnings of $0.73 per share for the first quarter, which excludes about $835,000 of pretax merger charges and $583,000 of pretax losses on the sale of bank premises. Outside of these charges, we recorded net income of approximately $27.8 million or $0.73 per share compared to $21.6 million or $0.60 in the same quarter of 2017.

Due to the Tax Cuts and Jobs Act that was passed in the fourth quarter of 2017, our effective income tax rate declined to 22.4% in the first quarter compared with 32.6% in the same period of '17. This equates to approximately $3.3 million of reduced income tax expense in the quarter and positively impacted our EPS by $0.08 a share. We believe our effective tax rate will be between 22.5% and 23.5% going forward.

One of the key metrics we continue to focus on in 2018 is our operating efficiency ratio. This ratio for the first quarter was 59.95%, an improvement from the 60.88% reported in the fourth quarter of last year. Our adjusted noninterest expenses declined $494,000 in the first quarter of 2018 compared to the fourth quarter of last year. Ed alluded to this earlier that the efficiencies we expect to gain from the pending acquisitions and our organic growth should drive our efficiency ratios throughout this year. And we believe it to be in the mid-50s by the end of 2019.

As Ed mentioned, our operating return on assets or ROA in the quarter came in at 1.44, up from 1.27% we reported in the same quarter of '17. The reduced effective tax rate discussed earlier positively impacted our ROA by 17 basis points, so assuming an equal tax rate, our ROA was consistent at the 1.27%.

This is noteworthy considering the organic growth we've had in this competitive environment and with the yield curve. Additionally, we have half of the accretion income in the current quarter that we had a year ago, which otherwise would have lowered our ROA by 7 basis points.

Essentially, all things being equal, our core bank and our lines of business have grown over the past year in a manner that was accretive to our already strong ROA and more than made up for the declining accretion income. This is outstanding in our opinion and reflects the hard work of our bankers in today's climate.

Our return on tangible common equity was 17.09% in the first quarter of '18 compared to 15.84% for the same period last year. Excluding the impact in the tax law change, our return on tangible common equity would have been 15.07%, an increase from the fourth quarter of '17, but a slight decline from the first quarter of last year. That year-over-year decline is attributable to our increased capital levels.

Our average tangible common equity has increased over 19% or over $105 million this year due to the final purchase of USPF and our strong earnings stream. Our net interest margin exclusive of accretion improved by 2 basis points during the quarter from 3.82% in fourth quarter of '17 to 3.84% in the first quarter of this year. Again, this is noteworthy given the impact of the tax law change that reduced our margin by 6 basis points related to your muni loans and muni investments. Our yield on earnings assets increased by 3 basis points, mostly in our legacy loans.

Yields on new loan production increased to 5.19%, up from 4.89% in the fourth quarter of '17.

In addition, reduced levels of short-term assets and steady deposit costs also helped to improve the margin. Noninterest income increased to $26.5 million for the quarter. Service charges on deposit accounts remain stable. Our retail mortgage division had a really strong quarter. When compared to the first quarter of last year, their production increased over 14%, their revenue increased almost 23% and their net income increased to $4.7 million.

Our mortgage division continued to produce solid financial results. They remain focused on relationships with solid builders and real estate brokers, and they continue to benefit from many years of producing solid results for their customers.

One of the strongest success stories we have this quarter is in noninterest expense. Noninterest expense decreased $239,000 during the quarter to $59.1 million compared to the $59.3 million in the fourth quarter of last year. On an adjusted basis, our noninterest expense actually declined $494,000 to $57.7 million from the $58.2 million reported last quarter.

Included in the first quarter was approximately $1.1 million of increased payroll taxes that are typically outsized in the first quarter of each year, and they tail off dramatically in coming quarters.

On the balance sheet side, total assets increased over $166 million and earnings assets increased to $105 million. Organic loan growth totaled $153.8 million or 10.8% organic loan growth for the quarter. This compares to $138.2 million or 10.1% in the fourth quarter of last year and $98.5 million or 8.5% growth in the first quarter of last year.

Pipelines remain strong, and we are optimistic about the growth opportunities in the second quarter. Our loan growth continues to be diversified both among product type and region. Commercial real estate accounted for over half of our loan growth with residential and consumer and C&I also showing the strong growth.

As a reminder, our C&I classification includes municipal, mortgage warehouse and premium finance. Our strongest loan growth markets during the quarter were Jacksonville, Atlanta and Charleston. We continue to see growth in our lines of business, and we still believe that is sustainable going into the second quarter.

Loan production in the Premium Finance division remained strong as total production was $289 million for the quarter compared to $241 million last quarter and $251 million in the first quarter of last year. That's a 15% increase in production year-over-year. We believe we can sustain an annualized growth rate in this division of 10% to 15% over the next few years, while maintaining credit quality and profitability.

Our asset quality remains strong as our annualized net charge-off ratio was 9 basis points of total loans and 14 basis points of nonpurchased loans. Our nonperforming assets as a percent of total assets decreased to 61 basis points compared to 68 basis points at the end of the year. We had a nice move in nonperforming assets decreasing by $4.3 million or 8.2% during the quarter.

As expected, we had a normal seasonal decline in deposits during the first quarter of approximately $180 million. However, compared to the end of the first quarter of last year, deposits have increased almost $804 million while our loans have grown $874 million, which means we have funded approximately 92% of our loan growth with related to the deposit growth.

We believe the pending acquisitions, which will expand our presence in Atlanta and movements into Orlando and Tampa will give us more opportunities for deposit and loan growth going forward.

With that, I'll turn it over to Dennis for his comments.

Thank you, Nicole. And before I'll dangerously go off script here for a second and just recap something that hearing Nicole and Ed something that I've, kind of, just from a high-level -- I mean, we're reporting a 1.44% return on assets, 17% -- a little better than 17% return on tangible capital, sub-60% efficiency ratio, it is below 60%. And double -- and all of that on the operating ratio, there's still double-digit growth in organic double-digit growth. And when you look at those 4 ratios and you combine it with Ed's comments about the 2 deals that are pending, the 2 deals that are pending are accretive to all 4 of those ratios: Our return on assets, return on tangible capital, efficiency ratio and what we think is our long-term organic growth rate. The fact that we did 11% almost in the first quarter, which is seasonally our slowest quarter, we're pretty proud of.

The only thing -- the only comment, Nicole, that was good for -- hard for me to not be able to want -- be able to be the one to say those numbers, but that was good. The only comments I really want to make are kind of about the environment we're operating in, and Nicole alluded to a little. And I've heard some comments on other earnings calls about the situation that banks are feeling with respect to loan yields and pressures to grow deposits and still sort of hold costs in line.

And we're definitely feeling those pressures across-the-board. Given that we came in with loan growth right under 11%, in what's our toughest quarter, I am increasingly confident in our pretty bold loan growth goals for 2018. We're pretty bullish on the growth we're expecting out the team in Atlantic Coast and Hamilton, which can only be accretive to our growth rate, given their lending efforts in Orlando, Tampa and Orlando -- excuse me, in Atlanta.

Looking at the pipelines -- looking at their pipelines and their current pace of activity and what they did in the first quarter in those markets, I believe they'll hit the ground running and be pretty successful in our credit culture.

On the deposit side, we are bullish there. Every quarter, it seems we're seeing our annual pace of deposit growth to continue to inch higher and higher, getting closer to what we think is our long-term sustainable growth rate in loans. Again, the new exposure we're going to have in Orlando, Tampa and Atlanta, we expect that we'll be able to see another impressive reset in kind of what our long-term deposit growth rate is.

From a margin perspective, we've been successful moving loan and deposit pricing in lockstep and staying aggressive where we need to on both sides of the balance sheet.

On pricing, loans and deposits, I will tell you that it is tough out there. There are still more disciplined players on credit structure and on credit pricing than they are crazy folks, but the crazy and illogical pricing seems to always get the headlines. We're aggressive occasionally where we need to be as well. But in the aggregate, we seem to keep showing solid levels of production. And we continue to get decent yields and margins because we're looking for good relationships, taking care of the customers that have been with us for a decade. I would like to see more spread in yield curve, of course, but the fact is we haven't had a lot of spread in the yield curve for several years now. And we continue to put impressive growth numbers and have held the margins slightly -- and have held the margin stable or even seem to increase slightly. So given that -- and again, I don't like the pricing pressures that are out there, but the environment that we're in is really not anything different than where we have been operating. And I believe we'll be able to operate as we have in the past and still deliver results.

So with that, I'll turn it back to Rocha for any questions.

(Operator Instructions) Today's first question comes from Tyler Stafford, Stephens.

Maybe just to start on the deposits side. Dennis, just starting with your last comments there, you do sound clearly pretty bullish about the deposit growth this year. Can you just talk about the strategy that you guys have implemented or are focusing on to drive that deposit growth? And what you're seeing out there from a deposit costs standpoint as well?

I'll tell you the first strategy we have is sort of how we've reset incentive plans. We have a higher percentage of our bankers' incentive plans this year are deposit-orientated, so that helps. We've been hiring deposit officers in our larger market to -- that are focused solely on driving deposits. We have individuals that are selling deposits solely to our lines of business. So in markets, where we don't have branch facilities, but where we do have lending efforts. We've been cross-selling to those businesses. I'll tell you, our willingness to be aggressive on the deposit side and sort of moving lockstep, again, we're not -- we like where the margin is, and we like what it did this quarter especially. But we don't feel like we've got to have the margin moving higher to hit our numbers. I think we'll probably get more operating leverage off of the expense side, especially with the deals that are pending in our organic growth. So we're not looking for the margin to go from 3.84%, 3.85% to 3.95% or so. So we're willing to be a little more aggressive on the deposit side if we need to be. Does that answer your question?

Yes. That does. So staying within the margin, I think, I missed this in your remarks. What was the FT adjustment on the loan yields from the municipal loan portfolio this quarter that negatively impacted this?

6 basis points.

To total loan yields?

Yes.

Yes, and to the margin. The margin was 6 -- affected negatively by 6 basis points because of the tax law change.

Okay. And can you help us -- so we've got the March hike, obviously, and ACFC and Hamilton that'll be closing in 2Q and 3Q. With those, I guess, 3 dynamics going on with the funding cost pressure you're seeing out there, can you just kind of help us with the 2Q and 3Q kind of NIM trajectory from here?

I would tell you -- I'd tell you, stable. Definitely continue to be stable. I mean, and Hamilton and ACFC are probably going to take -- I -- if I brought several of our bankers in here, they'd tell you that we're getting a lot of pressure to grow deposits. I will tell that they're -- our bankers are delivering for us big time. I'm repeating what Nicole said, really proud what our bankers are doing. The adding ACFC and Hamilton, I think, it'll take a little bit of pressure off because, again, we're almost funding 100% of our loan growth now. And when we get exposure to the markets that we're about to move into, I think, it's going to take a little bit of pressure off. So I'd -- I think that pressure is coming off, I think, would only help us on the margin. But again I'm not -- we don't want to -- the message is not, around here, that we're trying to grow our margin. That's not what our bankers are hearing. We're trying to maintain the margin, keep it pretty stable and continue hitting the growth numbers that we've got laid out.

Got it. Okay. And then -- yes.

Can I add something here to your question, I don't feel like I answered it fully. The impact to our margin on the tax impact was 6 basis points, but I think you specifically asked about loans. Loans was 8 basis point and then our nontaxable securities were 73 basis points. So that gave the overall earning asset yield to 6 basis points.

Got it. That -- yes, that makes more sense. Thanks for clearing that up. And then just last one from me. The tangible book value, I think, came in below forecast or estimates. I assume that partially has to do with the USPF. Can you just walk through the dynamics of the tangible book value this quarter?

Sure. It's actually -- there's 2 components that you're correct that the bulk of it is the USPF, the final acquisition there. We -- conservatively, we booked the entire contingent consideration this quarter, but this really -- we've had that built-in in our model, but just not all to hit in that first quarter. So our earn back has not changed from our initial estimate, it's just we have all of that contingent consideration in the purchase price, in the first quarter.

And then the second -- yes.

Yes, the second component is our accumulated -- our investment security, our loss on our (inaudible) about $9 million there.

That was about $0.26.

And our next question comes from Brady Gailey of KBW.

I was going to ask whether you found the extra 5 basis points to get the efficiency ratio down to a 5 handle, but I'll leave that one alone.

But we were at 60 until Ed came in and check his finger, and we went digging again. I forgo -- I forewent my last paycheck.

So my first real question is just on mortgage. Y'all had a record quarter this quarter. If you look at mortgage as a percent of earnings, it's 17% to 18% of 1Q earnings, which is getting on up here. Now Hamilton will also help you out on the mortgage front. But maybe just bigger picture, you're seeing nice growth in mortgage. Where do you think mortgage as a percentage of earnings tops out? Will it continue to grow? Or do you think we're nearing the peak here?

The -- I'd be pretty comfortable probably all the way up to 20%. But what I would tell you is that as strong as the mortgage folks are and are probably listening, I think we're going to outgrow on this year with Hamilton and Atlantic Coast on the core banking side. But sort of knowing that we were going to get back into the -- what you're seeing in the results. Knowing that we're going to get back into the traditional banking M&A, our mortgage folks got out recruiting pretty hard in the third and fourth quarter of last year. And what you're seeing is some of the results of their recruiting. So it's just incremental volumes coming in. And so I think after we do the ACFC deal and the Hamilton deal, you'll probably see us drop back to 14% or 15%. But I think we're going to continue to be very aggressive recruiting experienced mortgage bankers that have relationships with construction firms or real estate brokers. The Hamilton too -- the Hamilton -- one thing about Hamilton that we're pretty excited about is, they've got an outstanding residential construction group in Atlanta. And we think the cross-sale, again, given how successful we are with construction firms, we think the opportunity to cross-sell that in Atlanta would be pretty successful. We're -- that's -- again, those -- that wasn't even baked into our numbers when we made the deal announcement, but something we've kind of getting our mind around right now.

Okay. And then in the slide deck, I know you have a bullet that kind of talks about kind of a normalized ROTCE in the 16% to 18% range for 2018. You printed a 17% this quarter. You have the 2 deals coming in later this year, I mean, that will both increase earnings and leverage your capital a little bit. So to me it seems like that 16% to 18% is conservative and you could be a little higher than that. Or do you think 16% to 18% is really the right number?

Brady, Nicole might be more conservative in her presentation skills than I am. But I mean, it's hard. You're exactly right, honestly. And like I started off the ROA at 1.44%. The deals are accretive to our ROA. And I don't mean by 1 basis point or 2. It's -- given with this tax rate, those deals easily will push us over 1.50% and that alone before any leverage or additional leverage is going to push ROTCE up closer probably to 20%. It's hard -- it's kind of like last year when we had done 20% loan growth. And I think it was hard to acknowledge that was -- we were able to -- going to be able do that again year after year after year, but 20% hard to say that it's sustainable. And the fact -- you know honestly -- TCE is at 8.30%, and we want to build that back to 9%. So I don't think we would get ROT -- I don't think we'll get leverage -- improved ROTCEs from leverage as much as we want to get it from a higher return on assets, which we think is right around the corner.

Okay. And then the last one from me. You all mentioned a couple of times the mid-50% efficiency ratio. Is that -- from a timing point of view, is that something that's possible, like, later this year? Or is that -- I thought Nicole had maybe mentioned, like, by the end of '19. Just what -- how you think about that from a timing point of view on when you can get to that mid-50% level?

Successfully integrating the deals that we have plus the organic growth that we are expecting this year should put us in the mid-50s by the end of this year, the fourth quarter of this year.

And our next question today comes from Jennifer Demba, SunTrust.

I'm sorry, I jumped on late. So if you've covered this, I apologize. Can you just talk about your M&A interest as it stands right now, given you got 2 deals still pending?

We -- having 2 deals pending has not slowed us down from having conversations and trying to have -- and we think we know when the deals are going to be approved and closed and integrated. And so a lot of our conversations are centered on kind of timing things out so that we'll be ready, probably end of this year to do something else. And I guess, the next question would be geography, and I would tell you probably anything in Florida or Metro Atlanta.

Okay. And could you remind us on sweet spot in terms of size, maximum size, minimum size?

I mean, we looked at a -- I guess, pro forma we're about $11.5 billion. So recently, we looked at $0.5 billion deal. And -- so it's a good bank. But we didn't get very -- we didn't get pretty -- we did not get impressive earnings per share results or economics out of it. And it had nothing to do with the bank, it had nothing to do with the assumptions or the market or anything like that. It just really had to do with $0.5 billion against $11.5 billion. So I'll -- we used to probably say $500 million to $1.5 billion, it's probably, I would say, $1 billion is about at the small as we're going to be able to go and still get the good economics, probably up to $2 billion or $3 billion.

(Operator Instructions) Today's next question comes from Christopher Marinac of FIG Partners.

And Dennis to follow-up on the same M&A theme. What are the opportunities in Atlanta and also in Florida to take advantage of the mergers that have already happened in terms of just putting up additional employees, customers, et cetera?

No, okay. I'm sorry, the question was, if it wasn't M&A, what would we do organically?

It was organically taking advantage of mergers that have already happened outside.

That is -- I'm glad you have asked that. It's -- and Ed can come by me and comment on this because I know he will want to. The one of the -- some of the -- one of the things that we're seeing, I mean, M&A pricing is expensive. The -- some of the active acquirers are trading for close to 3x book and everybody has got good or solid operating results and all that sort of reflected in some of the M&A pricing. And really for the last couple of quarters, we have been much more active in commercial banker recruiting. And I would tell you, it's not -- most of it -- most of that recruiting is centered on some of the big banks, larger banks where we're trying to recruit teams. And I think may be getting close on a few. But that centered in our larger markets in the -- and some in the larger markets, where we're going, not just where we already are. And maybe a few markets where we think we'll end up. But I would tell you we're not outside of the markets, where we're already operating and talking to some teams. Those I feel pretty confident that we can do something this year. Outside of those markets, I think, we want to be cautious. But we're definitely seeing more commercial banker, more opportunities to hire commercial bankers and commercial banker teams. And I think that -- that's -- I like the timing of that given how pricey M&A has been. I still think given where our stock trades, and how successful we've been with past integrations, we can still make M&A deals. So I'm not -- don't want anybody to hear that M&A is not an opportunity for us. I'm just saying it's pricey and the economics that you get are not as good as they were say 18 months ago. We can still make M&A deals, but we are lacking the opportunity that we're seeing on the M&A -- I mean, excuse me, on the commercial banker opportunity. Do you want to comment on price?

Chris, I would say, I echo what Dennis says. But I would point out that when we had a pause on M&A and really focused much more diligently on our core and organic growth, it helped us realize some leverage of our people. It helped us leverage our efficiency a little, and refine some of our processes and get prepared to grow faster as we go over $10 billion, but it helped us to be successful organically. And that really was our focus for a while, and it continues to be our focus. It does not exclude M&A. But as you know, we're really disciplined on M&A and the economics have to be there, that strategic piece has to be there. But the economics have to be present as well. And it is more difficult to get over the economic hurdle today. So we think we can deliver double-digit growth without M&A. And so with M&A, we think we can do even better than that. So we're really pleased with the position we're in. And we think we will have opportunities for M&A. But that's not the sole focus of opportunity either.

And this concludes the question-and-answer session. I'd like to turn the conference back over to Dennis Zember for any closing remarks.

Thank you, again, for your time this morning. If you have any questions or comments me or Nicole or Ed are always available. All right. Thank you. Have a great weekend.

Thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.