Ameris Bancorp: 2Q 2018 Form 10-Q Summary
Business Context and Reporting Period
Ameris Bancorp is a Georgia-based financial holding company operating primarily through Ameris Bank. At June 30, 2018, the Bank operated 126 branches in Georgia, Alabama, Florida and South Carolina and conducted banking, mortgage, warehouse lending, SBA and premium-finance activities. This unaudited filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods, and the balance sheet as of June 30, 2018, compared with December 31, 2017.
During the first six months of 2018, Ameris completed the acquisitions of US Premium Finance Holding Company, Atlantic Coast Financial Corporation and Hamilton State Bancshares. Atlantic and Hamilton closed during the second quarter and materially increased assets, loans, deposits, goodwill and common shares outstanding.
Key Financial Metrics
| Metric | 2Q18 | 2Q17 | 6M18 | 6M17 |
|---|---|---|---|---|
| Total interest income | $89.9 million | $71.4 million | $169.5 million | $138.5 million |
| Net interest income | $76.0 million | $63.2 million | $144.8 million | $123.7 million |
| Provision for loan losses | $9.1 million | $2.2 million | $10.9 million | $4.0 million |
| Noninterest income | $31.3 million | $28.2 million | $57.8 million | $53.9 million |
| Noninterest expense | $86.4 million | $55.7 million | $145.5 million | $108.8 million |
| Net income | $9.4 million | $23.1 million | $36.0 million | $44.2 million |
| Diluted EPS | $0.24 | $0.62 | $0.92 | $1.20 |
On a tax-equivalent basis, second-quarter net interest income was $76.9 million and the net interest margin was 3.95%, unchanged from 2Q17. Six-month tax-equivalent net interest income was $146.7 million, up 15.6%, while the net interest margin declined to 3.93% from 3.96%.
- Average earning assets increased 18.7% year over year in 2Q18 to $7.82 billion, driven primarily by loan growth and acquisitions.
- Noninterest income increased 11.1% in 2Q18, including mortgage banking income of $14.9 million and $2.0 million of income from a reduction in the estimated USPF contingent consideration liability.
- Efficiency ratio was 80.50% in 2Q18 versus 61.02% in 2Q17; the deterioration primarily reflected merger and conversion costs, executive-chairman retirement benefits and other integration-related expenses.
- Return on average assets was 0.44% in 2Q18 versus 1.29% in 2Q17. Return on average common equity was 3.86% versus 11.95%.
- Management reported adjusted 2Q18 net income of $29.2 million, or $0.74 diluted EPS, excluding merger and conversion charges, executive-chairman retirement benefits and losses on premises sales. Six-month adjusted net income was $57.0 million, or $1.46 diluted EPS.
Financial Position, Debt and Liquidity
| Balance-sheet metric | June 30, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $11.19 billion | $7.86 billion |
| Total deposits | $8.76 billion | $6.63 billion |
| Loans, net of unearned income | $8.49 billion | $6.05 billion |
| Allowance for loan losses | $31.5 million | $25.8 million |
| Other borrowings | $862.1 million | $250.6 million |
| Shareholders’ equity | $1.37 billion | $804.5 million |
| Cash and cash equivalents | $424.7 million | $330.7 million |
Legacy loans increased 10.8% to $5.38 billion, while purchased loans increased 226.4% to $2.81 billion, primarily from the Atlantic and Hamilton acquisitions. The loans-to-deposits ratio was 96.91% at June 30, 2018. Available liquidity included $990.6 million of FHLB borrowing capacity, $30.0 million under a revolving credit facility and $755.2 million available through the Federal Reserve discount window. Management stated that liquidity ratios were satisfactory and identified no known trend likely to cause a material liquidity change.
For the six months, operating activities used $55.5 million of cash and investing activities used $190.7 million, while financing activities provided $340.2 million. Cash and cash equivalents increased $94.1 million.
The Bank was considered well capitalized under all regulatory capital measures. At June 30, 2018, the consolidated Tier 1 leverage ratio was 11.51%, CET1 ratio was 9.49%, Tier 1 capital ratio was 10.50% and total capital ratio was 11.70%.
Material Changes Versus Prior Periods
- Net income declined 59.3% in 2Q18 and 18.5% for the first six months, despite substantial growth in net interest income, because of higher provision expense and noninterest expenses.
- Second-quarter noninterest expense increased $30.6 million, including $18.4 million of merger and conversion charges and $5.5 million of executive-chairman retirement benefits. Six-month merger and conversion charges totaled $19.2 million versus $0.4 million in 6M17.
- Provision expense increased because approximately $6.7 million related to two impaired premium-finance loan relationships.
- Mortgage production increased to $522.1 million in 2Q18 from $400.2 million and to $878.1 million for the first six months from $712.0 million, although gain-on-sale spreads narrowed.
- Common shares outstanding increased to 47.5 million at June 30, 2018 from 37.2 million at June 30, 2017, principally due to acquisition-related stock issuance. Book value per common share increased to $28.87, while tangible book value per share was $17.12.
- Accumulated other comprehensive loss increased to $12.6 million from $1.3 million of loss at December 31, 2017, primarily due to unrealized losses on available-for-sale securities. Management considered the losses temporary.
Outlook, Risks, Contingencies and Unusual Items
Management stated that improving economic conditions and increased loan demand were expected to support consistent interest income. The filing does not provide formal earnings or revenue guidance. Results may be affected by interest-rate movements, funding costs, competitive pricing, regulatory changes, economic conditions, acquisition integration, realization of expected synergies, weather and other catastrophic events.
- Total nonperforming assets were $75.3 million, or 0.67% of total assets, versus $53.1 million, or 0.68%, at December 31, 2017. The increase primarily reflected nonaccrual purchased loans acquired in the Atlantic and Hamilton transactions.
- Legacy nonaccrual loans increased to $16.8 million from $14.2 million. Purchased nonaccrual loans increased to $33.6 million from $15.4 million.
- Commercial real estate excluding owner-occupied properties represented 34% of total loans, up from 30%, with actual construction and development exposure at 87% of risk-based capital and total CRE exposure at 264%, below internal limits of 100% and 300%, respectively.
- The allowance for loan losses was $31.5 million, or 0.37% of total loans. Six-month net charge-offs were $5.2 million, compared with $2.9 million in 6M17.
- Acquisition purchase-price allocations remained preliminary. Hamilton generated $220.7 million of goodwill, Atlantic generated $91.4 million and USPF generated $67.2 million. Final valuations could result in adjustments.
- USPF sellers may receive additional cash payments of up to $5.8 million through June 30, 2019, subject to premium-finance earnings targets. The recorded contingent consideration liability was $3.7 million at June 30, 2018.
- Off-balance-sheet commitments included $1.53 billion of commitments to extend credit, $109.4 million of unused home-equity lines, $16.4 million of standby letters of credit and $153.5 million of mortgage interest-rate locks.
- Management reported no material pending legal proceedings, no material changes to previously disclosed risk factors and effective disclosure controls.
Important Facts for Investors to Verify
- Whether the Atlantic and Hamilton acquisitions achieve expected cost savings, revenue synergies and integration benefits.
- The performance and loss experience of the rapidly expanded purchased-loan and premium-finance portfolios, including the two relationships driving the $6.7 million provision charge.
- Trends in funding costs, deposit pricing, FHLB borrowings and the effect of interest rates on the 3.93% six-month net interest margin.
- The level of commercial real estate concentration, classified loans, nonaccrual loans and future provision requirements.
- Final purchase-price allocations, goodwill and intangible valuations for the 2018 acquisitions.
- The sustainability of adjusted earnings after merger costs, retirement benefits and other unusual items are no longer present.
- The impact of pending CECL, lease and other accounting standards, including the expected one-time equity and allowance adjustment from CECL adoption.