Ameris Bancorp 10-Q Summary
Business Context and Reporting Period
Ameris Bancorp is a financial holding company headquartered in Moultrie, Georgia, operating primarily through Ameris Bank. At June 30, 2019, the Bank operated 114 branches across Georgia, Alabama, Florida and South Carolina. Reported results cover the three and six months ended June 30, 2019, compared with the same periods in 2018. The financial statements are unaudited.
On July 1, 2019, after the reporting date, Ameris completed its acquisition of Fidelity Southern Corporation. Ameris issued approximately 22.2 million shares valued at $869.3 million. Fidelity reported approximately $4.78 billion of assets, $3.92 billion of gross loans and $4.04 billion of deposits at June 30, 2019.
Financial Results and Key Metrics
| Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Net interest income | $101.7 million | $76.0 million | $201.0 million | $144.8 million |
| Provision for loan losses | $4.7 million | $9.1 million | $8.1 million | $10.9 million |
| Noninterest income | $35.2 million | $31.3 million | $66.0 million | $57.8 million |
| Noninterest expense | $81.3 million | $86.4 million | $156.7 million | $145.5 million |
| Net income | $38.9 million | $9.4 million | $78.8 million | $36.0 million |
| Diluted earnings per share | $0.82 | $0.24 | $1.66 | $0.92 |
| Return on average assets | 1.34% | 0.44% | 1.38% | 0.89% |
| Return on average common equity | 10.27% | 3.86% | 10.60% | 7.72% |
| Tax-equivalent net interest margin | 3.91% | 3.95% | 3.93% | 3.93% |
Q2 2019 net interest income increased 33.8% year over year, while net income increased substantially from the prior-year quarter, which included significant acquisition-related and executive retirement costs. Six-month net income increased 118.6% year over year. Management reported adjusted net income of $45.2 million, or $0.96 per diluted share, for Q2 2019, and $87.8 million, or $1.85 per diluted share, for the first six months, excluding specified unusual items.
- Mortgage banking income was $18.5 million in Q2 and $33.2 million for the first six months, compared with $15.4 million and $27.7 million, respectively, in the prior-year periods.
- Q2 mortgage production was $585.1 million, with a 3.11% gain-on-sale spread. The retail mortgage pipeline ended the quarter at $287.4 million.
- Average interest-earning assets increased to $10.55 billion in Q2 2019 from $7.82 billion in Q2 2018. Legacy loan yields increased, but deposit and other funding costs also rose.
- The efficiency ratio was 59.36% in Q2 and 58.67% for the first six months, compared with 80.50% and 71.82%, respectively, in the prior-year periods.
Balance Sheet, Liquidity and Capital
| Metric | June 30, 2019 | December 31, 2018 |
|---|---|---|
| Total assets | $11.89 billion | $11.44 billion |
| Total deposits | $9.58 billion | $9.65 billion |
| Loans, net of unearned income | $9.05 billion | $8.51 billion |
| Loans held for sale | $261.1 million | $111.3 million |
| Cash and cash equivalents | $338.2 million | $679.5 million |
| Other borrowings | $564.6 million | $151.8 million |
| Shareholders’ equity | $1.54 billion | $1.46 billion |
Legacy loans increased 15.2% to $6.52 billion, while purchased loans declined 11.7% to $2.29 billion. The loan-to-deposit ratio was 94.44% at June 30, 2019, compared with 88.21% at year-end. Liquidity resources included $1.70 billion of FHLB borrowing capacity, $30.0 million available under a regional-bank revolving line and $1.12 billion available through the Federal Reserve discount window. Management stated that liquidity ratios were satisfactory and that it was aware of no events likely to cause a material liquidity change.
The Bank was considered well capitalized under all regulatory capital measurements. At June 30, 2019, the consolidated Tier 1 leverage ratio was 9.47%, CET1 ratio was 9.75%, Tier 1 capital ratio was 10.66% and total capital ratio was 11.74%. The Bank’s corresponding ratios were 10.66%, 12.00%, 12.00% and 12.32%.
Material Changes Versus Prior Comparable Period
- Net interest income benefited from the 2018 Atlantic and Hamilton acquisitions and growth in legacy loans; the six-month tax-equivalent net interest margin remained 3.93%.
- Funding costs increased materially: the Q2 cost of interest-bearing liabilities rose to 1.51% from 1.01%, while deposit costs increased to 0.97% from 0.47%.
- Q2 noninterest expense decreased 5.9%, primarily because merger and conversion charges fell to $3.5 million from $18.4 million and 2018 included $5.5 million of executive retirement benefits.
- Six-month noninterest expense increased 7.7%, reflecting higher occupancy, data processing, consulting, amortization and production-related costs.
- Total non-performing assets declined to $60.8 million, or 0.51% of total assets, from $63.0 million, or 0.55%, at December 31, 2018.
- The allowance for loan losses increased to $31.8 million from $28.8 million, while the total allowance ratio increased modestly to 0.35% of loans from 0.34%.
- Cash and cash equivalents declined by $341.4 million during the first six months, primarily reflecting $678.0 million of net cash used in investing activities, including $880.2 million of net loan growth.
Outlook, Risks, Contingencies and Unusual Items
The filing provides no formal earnings or revenue guidance. Management’s forward-looking statements identify risks from economic and market conditions, interest-rate movements, competition, regulatory changes, acquisition integration, weather and natural disasters, commodity prices, funding conditions and the successful realization of acquisition synergies.
- Ameris expects to adopt the current expected credit loss standard, ASU 2016-13, on January 1, 2020. Management expects a one-time cumulative effect adjustment to equity and the allowance for loan losses, but the amount was not yet clear.
- Commercial real estate represented 34% of total loans, including purchased loans, at June 30, 2019. Construction and development loans were 91% of total risk-based capital, and total CRE loans excluding owner-occupied properties were 253% of total risk-based capital.
- Q2 unusual items included $3.5 million of merger and conversion charges, a $1.5 million mortgage servicing rights valuation adjustment, $2.8 million of losses on premises sales and a $50,000 hurricane-related impact.
- Off-balance-sheet exposures included $1.72 billion of commitments to extend credit, $108.9 million of unused home-equity lines, $25.4 million of standby letters of credit and $204.1 million of mortgage interest-rate lock commitments.
- Legal proceedings involving CEBV, William Villari and related entities were described as lacking merit by management. The company stated that any reasonably possible or probable loss was not expected to have a material adverse effect, although the filing does not provide a quantified exposure.
- Ameris had repurchased $10.6 million of common stock, or 296,335 shares, under its $100 million authorization as of June 30, 2019. The remaining authorization was $89.4 million.
Investor Verification Checklist
- Verify the final purchase-price allocation, goodwill, capital impact and integration performance of the Fidelity acquisition, which closed after quarter-end.
- Assess whether loan growth, particularly commercial real estate and premium finance lending, is consistent with underwriting capacity and credit-risk limits.
- Monitor deposit pricing, funding mix, loan-to-deposit levels and the effect of higher funding costs on the net interest margin.
- Evaluate the assumptions and eventual quantified impact of CECL adoption on capital, allowance levels and earnings.
- Reconcile reported net income with management’s adjusted results and determine whether merger, restructuring, MSR, premises-sale and other unusual items are recurring.
- Review regulatory capital ratios after the Fidelity transaction and confirm continued well-capitalized status.
- Track the pending legal proceedings and any changes to management’s assessment of potential loss.