CommunityOne Bancorp (NASDAQ:COB)
Q4 2015 Earnings Call
January 29, 2016 11:00 AM ET
Beth DeSimone – General Counsel
Robert Reid – President and Chief Executive Officer
David Nielsen – Chief Financial Officer
Neil Machovec – Chief Credit Officer
Good morning, and welcome to CommunityOne Bancorp Fourth Quarter 2015 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference call over to Ms. Beth DeSimone, General Counsel. Please go ahead.
Good morning. I would like to welcome everyone to the CommunityOne Bancorp fourth quarter 2015 earnings presentation. If you're logged on to our website at www.community1.com, we have placed a slide presentation on the Investor Relations page, and you can follow along the presentation as we go through it.
The presentation today contains certain forward-looking statements relating to CommunityOne's financial condition, results of operations, plans and objectives and business. These statements are by their nature subject to risk and uncertainty, including those we have identified and discussed in our securities filings, including in our Annual Report on Form 10-K, our quarterly reports on Form 10-Q and our other securities filings. Actual results may differ materially from those expressed in our forward-looking statements. We do not promise to update these forward-looking statements to reflect actual results or any changes in assumptions or other factors that could affect them. The presentation also contains certain non-GAAP financial measures. We believe that these non-GAAP measures are useful for investors in understanding our underlying operational performance and trends. A reconciliation of non-GAAP measures to the most recently comparable GAAP measure is included within tables in the presentation and in the appendix to it.
Now, I'm pleased to turn the call over to Bob Reid, President and CEO of CommunityOne Bancorp. Bob?
Okay, thanks Beth and good morning and thank you for being on the call today. As in the past, I have with me, Dave Nielsen, our CFO and Neil Machovec, our Chief Credit Officer. Today we'll be reviewing our fourth quarter and year-end 2015 performance, so I ask that you refer to the investor presentation on the Investor Relations page of our website.
Also, as everyone knows, as we entered into a definitive merger agreement with capital buying financial in November of 2015. The closing date has not been finalized as of this conference call today, and is obviously subject to regulatory approval but given the pending closing of this deal, I wanted to make sure you are aware that we do not plan to have an investor call at the end of the first quarter 2016.
So let's review our fourth quarter and annual 2015 operating highlights, and compare those to the goals we established in 2015, at the beginning of the year. I'll refer you to the pages four, five and six in the investor presentation as I go through my comments.
Core net income which excludes merger related expenses for the pending capital merger was $2.7 million or $0.11 per share which was up 16% over fourth quarter 2014. For the year, we were happy to report core net income of $10.7 million or $0.44 per share which is 43% over 2014. Net income for the year was $6.9 million or $0.29 per share. Key drivers of our improved core earnings performance were solid line growth and deposit growth, continued positive credit trends, core non-interest income growth and declining expenses year-over-year.
Loan growth in the fourth quarter grew at an annualized rate of 6% before the year we experienced loan growth of 14%, which exceeded our 2015 growth objective of 10 to 12%. Deposit growth was equally impressive with deposit growth for the fourth quarter annualized at 11% resulting in a 9% growth in deposits for the year of 2015. We were especially pleased with the non-interest-bearing deposit growth of 19% on continued commercial relationship acquisition and the expansion of treasury management product sales. Also, our branch network did an exceptional job in customer retention and growth in our money market accounts and savings accounts. We did fall slightly short of our loans to deposits ratio objective of 80 to 85%, ending the year at 79%, but that really was a result of outsized growth in deposits above our expectations. Obviously, this is a nice problem to have as we continue to grow our balance sheet during the first quarter of 2016. Our lines of business continue to report strong pipelines as we move through the first quarter.
As it relates to asset quality, we continue to see positive credit trends and non-performing assets fell to 1.5% of assets. Neil will give you more details on the credit quality trends in a few minutes.
Moving to the income statement, we did see some compression in the net interest margin, but still experienced a 4% growth in net interest income over fourth quarter 2014 and 7% growth for the year. Net interest margin for the year was down 3 basis points compared to 2014. As it relates to core non-interest income, we had strong growth of 15% in the fourth quarter of 2015 compared to comparable time in 2014, largely due to strong performance in mortgage and SBA income as well as service charge income. Core non-interest income for the year grew $1.8 million or 9%, which were slightly below our 2015 expectations.
Non-interest expense continued to be well controlled and actually fell 4% for the year. FTE reduction of 3% drove a significant portion of the reduction combined with other expense reduction actions we took in the first half of 2015. As a result, our pre-credit non-recurring NIE to average assets ratio was 3.03%, beating our 3.1% goal for 2015.
As all of you are aware, we entered into a definitive merger agreement with Capital Bank Financial Corp. on November 22, 2015. And as a reminder, we have highlighted some of the key components of that transaction which are located on page seven of the presentation. I'm excited about our pending partnership with Capital Buying and that it creates an enhanced scale in the fast growth North Carolina markets and will increase our capability and capacity to serve our customers throughout the year.
So we're very proud of what we accomplished in 2015 and now I'd like to turn it over to Dave for additional comments and some additional details. Dave?
Thanks, Bob. As you can see turning to page eight, net interest income grew nicely up $0.7 million or 4% this quarter versus the fourth quarter of last year. Average earning assets also grew $210 million or 11% year-over-year that growth was partially offset by 43 basis point lower loan yield and 16 basis points lower securities yield.
Net interest margin as Bob mentioned was 329 in the fourth quarter that’s down 20 basis points from the fourth quarter of last year. Year-over-year NIM change was drive again by that 43 basis point lower loan yield, mostly from lower rates and increased variable rates loan origination. 10 basis points of that decline in loan yield related to reduced purchased and paired load accretion as that portfolio has reduced over the past year.
We did have a one basis point increase in the cost and deposits as a result of promotional activity primarily in the money market and CD book, offsetting these items with a slightly better mix as 73% of average assets were in loans of this quarter that’s up from 71% a year ago.
Interest accretion from granted purchased impaired loans in access of the contractual interest received was lower by $0.2 million from the fourth quarter of last year, again as a result of the declining balances in asset mix in that portfolio.
I mentioned that the class of interest rating deposits gross one basis point from a year ago and two basis points from last quarter to 48 basis points, we were, as Bob mentioned, quite successful with this quarter with a 120 day promotional money market rate, the impact of the promotional rate should begin to tap her off at the end of the first quarter of this year.
Turning to page nine, you can see that really across the board we had a very strong quarter for core non-interest income growth which excludes securities gains and other non-recurring items which was up 15% year-over-year. Core non-interest income was $5 million this quarter, up $0.7 million from the fourth quarter of last year. It was again a really nice quarter for our mortgage business with mortgage and SVA loan income up 82% from fourth quarter of 2014, as a result of investments that we've talked about on these calls that we made an origination personal and $5.3 million an SVA origination this quarter that’s a record quarter for us in terms of SVA origination.
Mortgage loan origination volume was $66.6 million, up 68% over the last year and origination of loans for sale – mortgage loans for sale to investors increased 55% year-over-year.
Total service charge income was also strong in the fourth quarter up $22 million or 13% versus the same quarter last year on fee income enhancements made during the first half of the year, and increased of protection product activity. Card holder emergent services income increased 7% year-over-year primarily as a result of increased customer activity levels.
And finally, our wealth division income of the third quarter grew 6% year-over-year principally as a result of increased assets under management and also increased security sales commissions.
Moving on to page 10, you can see there were two significant non-recurring expenses during the fourth quarter. We incurred a $2 million in merger expenses related to the capital bank transaction and we had $1.1 million in stock compensation expense related to the acceleration of investing of previously granted restricted stock awards for certain executive officers. Excluding these items and $1.6 million in branch closing costs we incurred in the fourth quarter of last year, core non-interest expense was $19.1 million that’s an increase of 1% from the fourth quarter of last year.
Year-over-year increase in core non-interest expense in the fourth quarter related to increases in ORIO expenses, some addition of run rate cost of the service bank branch that we purchased in June and increases in year-end personal cost and associated payroll taxes, these increases were partially offset by reductions related to lower branch operating cost from the fixed branch closures in the first quarter of 2015. Lower loan collection cost from reduced problem asset levels and lower marketing and professional fees.
Free credit and non-recurring NIE to average asset as Bob mentioned was 3.03 in the fourth quarter and also for the full year that was as you mentioned better than our full year goal of 3.1%. Average FTEs were 554 in the quarter that’s down 14 FTEs or 3% from last year, principally related to the six branches that we closed in March of this year offset by the addition of mortgage and commercial origination personal over the course of the year.
On page 11, you could see total assets grew at 8% during 2015 which was really right in line with our expectations. As I noted earlier, we continue to improve our asset mix with average loans at 73% of average earning assets up from 71% a year ago as loans help from investment grew by a $186 million over the course of the year.
Did you graphic focus of our loan-growth, you can see more clearly on page 12, the chart of our organic loan portfolio growth which excludes our purchase residential mortgage loan pools shows the continued accelerated pace of growth in our metro markets. These markets which includes [indiscernible] are in the top three, are the top three and for the top seven largest North Carolina MSA in terms of 2014 population. At quarter end, 75% of our portfolio was in these metro markets that’s up nicely from 72% a year ago.
We did have a specially strong performance in both the [indiscernible] markets with growth rates of 30% and a 109% respectively over the past year. Our non-metro markets which are generally slower growing with more limited lending opportunities also grew nicely at 7%.
Page 13 is our regular charting graph on loan growth and portfolio composition. We really had a very strong year from a loan growth perspective, no matter how you look at it. Total loans held from investment grew 14%, with all of our lines of business growing loans in all categories of loans growing as well.
Looking underneath the headline growth, past rated loans and organic loans also grew strongly during the quarter as well, excluding the purchased residential mortgage loan portfolio, organic loans grew 19% during 2015 and excluding the impact of problem loan resolution in the portfolio, total pass rated loans grew 18%.
Looking to page 14, we had another strong quarter around deposit growth and total deposits grew a $153.1 million or 9% during the year. Low cost core deposits grew 10% in 2015 and our non-interest bearing deposits grew 19% during the year. This growth is primarily the result of new commercial relation acquisition as well as the improved treasury management product set.
At the end of the fourth quarter, our average deposits for branch was $43.3 million to 21% increase since the fourth quarter of last year, as a result of our consolidation strategies and the deposit campaign initiatives that I've spoken about. The cost about our deposit base was 48 basis points in the fourth quarter and total cost of deposits was 39 basis points, both very stable over the past year.
Now let me turn the presentation over to Neil.
Thanks, Dave. Turning to page 15, page 15 illustrates our continued asset quality improvement. Looking at the quarterly asset quality trends page, you can see the classified loans decreased by $12.6 million or 20% during the year. Non-performing loans now represent only 1.2% of total loans, down from 1.9% at year end 2014. Pass rated loans comprised 95.6% of the loan portfolio, up from 92.4% a year ago and the year end classified asset ratio is 31%, a 24% improvement from a year ago.
With the progress we've made in reducing non-performing assets coupled with the growth in our loan portfolio, non-performing assets are now 1.5% of total assets, an improvement of 28% in the last year. The allowance decreased by $2 million in the quarter and $5.1 million for the full year. This reduction reflects a continuation in our improvements to asset quality, coupled with lower charge-off rates. The allowance at yearend was $15.2 million and represents 0.98% of loans held of investment.
As you can see, we had only $1 million in net charge offs in the quarter for an annualized 2015 net charge of rate of 15 basis points. This very modest charge off rate is the result of the number of factors. Our indirect auto finance business is growing and produces very attractive returns for the bank, but also has a higher level of credit loss reflective of the risk of the business. Offsetting these losses, this continued strong resolution activity by our special assets and collections groups.
These teams are delivering good recovery performance, primarily driven by recovery of prior loan losses taken in our commercial portfolio. We expect the commercial recoveries to diminish over time.
Turning to page 16, we'll address non-performing assets and the allowance for loan loss. Non-performing assets felt by $2.1 million or 6% in the quarter and $10.3 million, 23% over the past year. 2015 improvement was driven by a 26% reduction in non-performing loans and a 19% reduction in OREO.
At quarter end, 12.3% of total OREO inventory was under contract of sale. Now I'd like to have a quick discussion of the allowance.
The originated loan portfolio totaled $1.44 billion with an allowance of $12.2 million at December 2015 yearend. The granted purchased contractual loan portfolio consisting a performing revolving commercial and home equity loans totaled $18.2 million, with an allowance of $238,000 in the same period.
Finally, granted purchased impaired loans totaled $87.6 million at yearend with an allowance of $2.8 million, combined granted purchased impaired and purchased contractual loans represent only 6.8% of the total loan portfolio.
Now, I'm turning it back over to Bob.
Okay, Neil, thank you. In closing, I'm obviously very pleased with what we accomplished in 2015. And I've said before, we are excited about the pending merger with capital bank and the enhanced capability we'll have to serve our customers. But I also want to thank all the investors associated with our company over the past several years, you've been a great support to us and we still look forward to things occurring positively as we move into our partnership with capital bank.
So thank you for joining us today.
End of Q&A
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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