Ameris Bancorp 2018 Third-Quarter Form 10-Q Summary
Business context and reporting period
Ameris Bancorp is a Georgia-based financial holding company operating primarily through Ameris Bank. At September 30, 2018, the Bank operated 125 branches across Georgia, Alabama, Florida and South Carolina. The filing covers the three and nine months ended September 30, 2018; interim financial statements are unaudited.
The company completed three acquisitions during 2018: US Premium Finance Holding Company, Atlantic Coast Financial Corporation and Hamilton State Bancshares. Hamilton and Atlantic materially expanded the balance sheet, branch network and purchased-loan portfolio.
Key financial metrics
| Metric | Three months ended September 30, 2018 | Three months ended September 30, 2017 | Nine months ended September 30, 2018 | Nine months ended September 30, 2017 |
|---|---|---|---|---|
| Net interest income | $99.0 million | $66.9 million | $243.8 million | $190.6 million |
| Provision for loan losses | $2.1 million | $1.8 million | $13.0 million | $5.8 million |
| Noninterest income | $30.2 million | $27.0 million | $87.9 million | $80.9 million |
| Noninterest expense | $72.4 million | $63.8 million | $217.8 million | $172.6 million |
| Net income | $41.4 million | $20.2 million | $77.5 million | $64.4 million |
| Diluted earnings per share | $0.87 | $0.54 | $1.85 | $1.74 |
| Return on average assets | 1.47% | 1.07% | 1.12% | 1.20% |
| Return on average common equity | 11.78% | 10.04% | 9.47% | 11.39% |
All dollar amounts above are as reported in the filing and rounded to millions.
- Balance sheet: Total assets were $11.43 billion versus $7.86 billion at December 31, 2017. Deposits were $9.18 billion versus $6.63 billion, and shareholders’ equity was $1.40 billion versus $804.5 million.
- Loans: Loans, net of unearned income, were $8.53 billion, including $5.54 billion of legacy loans, $2.71 billion of purchased loans and $274.8 million of purchased loan pools. Loans held for sale were $130.2 million.
- Margins: Tax-equivalent net interest margin was 3.92% in the third quarter and 3.93% for the first nine months, compared with 3.95% and 3.96%, respectively, in the comparable 2017 periods.
- Credit quality: The allowance for loan losses was $28.1 million, or 0.33% of total loans, compared with $25.8 million, or 0.43%, at year-end 2017. Total nonperforming assets were $68.4 million, or 0.60% of total assets, versus $53.1 million, or 0.68%, at December 31, 2017.
- Cash flow: For the first nine months, operating activities used $93.5 million, investing activities used $159.4 million and financing activities provided $551.5 million. Cash and cash equivalents increased to $629.3 million from $330.7 million at year-end 2017.
- Debt and liquidity: Other borrowings were $656.8 million versus $250.6 million at year-end. The Bank had $1.50 billion available through FHLB lines, $859.3 million available through the Federal Reserve discount window and $30.0 million available under a $100.0 million revolving credit arrangement.
- Capital: Ameris Bank was considered well capitalized under all regulatory capital measurements. At September 30, 2018, the Bank’s Tier 1 leverage, CET1, Tier 1 and total capital ratios were 10.25%, 12.31%, 12.31% and 12.62%, respectively.
Material changes versus comparable periods
- Third-quarter net income increased 105.6% year over year, while diluted EPS increased 61.1%, aided by acquisitions, loan growth and lower unusual expenses than in the 2017 quarter.
- Nine-month net income increased 20.3% and diluted EPS increased 6.3%. Results included substantially higher merger and conversion costs and executive retirement benefits in 2018.
- Tax-equivalent net interest income increased 45.8% in the third quarter and 26.2% year to date, primarily because average earning assets expanded following the Atlantic and Hamilton acquisitions and legacy loan growth.
- Net interest margin declined modestly as funding costs increased. Third-quarter total funding cost rose to 0.90% from 0.57% in the prior-year quarter, while the cost of interest-bearing liabilities rose to 1.18% from 0.76%.
- Noninterest expense increased 13.5% in the third quarter and 26.2% year to date. Increases reflected acquired personnel and branches, higher data-processing costs, intangible-asset amortization, merger costs and executive retirement benefits.
- Net charge-offs increased to $10.7 million for the first nine months from $3.8 million in the prior-year period. Management attributed the increase primarily to elevated charge-offs in the premium finance division; approximately $6.7 million of the 2018 provision related to two impaired premium finance relationships.
- Accumulated other comprehensive loss increased to $16.6 million from $1.3 million at year-end, primarily because of unrealized losses on available-for-sale securities.
Acquisitions and unusual items
- Hamilton closed June 29, 2018, adding 28 branches. Consideration totaled $397.1 million, including $349.4 million of Ameris shares and $47.8 million of cash. Preliminary goodwill was $221.3 million.
- Atlantic closed May 25, 2018, adding 12 branches. Consideration totaled $169.3 million, including $147.8 million of Ameris shares and $21.5 million of cash. Preliminary goodwill was $93.3 million.
- USPF became wholly owned on January 31, 2018. Aggregate consideration was $83.0 million, including a $5.7 million present value of contingent earn-out consideration. Goodwill was $65.5 million. The earn-out may reach $5.8 million through June 30, 2019.
- Reported nine-month 2018 unusual pre-tax items included $19.5 million of merger and conversion charges, $6.4 million of executive retirement benefits, $229,000 of restructuring charges and $783,000 of losses on premises sales. Management reported adjusted net income of $100.3 million, or $2.40 diluted adjusted EPS, versus $68.7 million and $1.86 for the prior-year period.
Guidance, outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management stated that improving economic conditions and increased loan demand were expected to support consistent interest income.
- The filing identifies risks from rising funding costs, interest-rate movements, competitive pricing, regulatory changes, acquisition integration, real-estate and commercial lending concentrations, agricultural conditions, and credit deterioration.
- Commercial real estate excluding owner-occupied properties represented 34% of total loans, with construction and development loans at 77% of risk-based capital and total CRE loans at 258% of risk-based capital, below stated internal limits of 100% and 300%.
- After surpassing $10 billion in assets, the Bank became subject to additional regulatory oversight, including enhanced risk management and stress-testing expectations, CFPB examination authority, potentially higher FDIC assessments and a future cap on debit-card interchange fees. Management expects additional compliance costs and lower interchange revenue beginning in 2019.
- Hurricane Michael occurred after quarter-end and affected Florida and Georgia markets. Management projected a fourth-quarter 2018 pre-tax impact of $1.5 million to $2.3 million, subject to further assessment of credit losses, property damage, business interruption and customer assistance.
- Loan commitments to extend credit were $1.58 billion, unused home-equity lines were $112.7 million, standby letters of credit were $21.9 million and mortgage forward contracts with positive fair value were $246.6 million.
- The Board authorized a common-stock repurchase program of up to $100.0 million on October 25, 2018; the program does not require any repurchases.
- Management reported no material pending legal proceedings and no material changes to the risk factors disclosed in the 2017 Form 10-K.
Most important facts for investors to verify
- Whether the Hamilton, Atlantic and USPF acquisitions achieve expected integration benefits and cost or revenue synergies, given the substantial increase in goodwill and intangible assets.
- Whether credit quality remains stable as purchased loans, commercial real estate exposure and premium finance loans expand.
- The effect of higher deposit and wholesale funding costs on net interest margin and earnings.
- The final financial impact of Hurricane Michael and any related increase in provisions, charge-offs or operating expenses.
- The magnitude and timing of additional regulatory, compliance and FDIC assessment costs after crossing $10 billion in assets.
- The effects of the 2019 debit-card interchange-fee cap and the company’s authorized share-repurchase program on future revenue, capital and per-share results.