Ameris Bancorp — 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, 2017, the Bank operated 97 branches in Georgia, Alabama, Florida and South Carolina and reported Banking, Retail Mortgage, Warehouse Lending, SBA and Premium Finance divisions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods and December 31, 2016 balance-sheet amounts. Dollar amounts are in thousands unless otherwise stated.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Total interest income | $76.3 million | $62.2 million | 23% |
| Net interest income | $66.9 million | $57.1 million | 17% |
| Provision for loan losses | $1.8 million | $0.8 million | Higher |
| Noninterest income | $27.0 million | $28.9 million | Down 6.5% |
| Noninterest expense | $63.8 million | $53.2 million | Up 19.9% |
| Net income | $20.2 million | $21.6 million | Down 6.5% |
| Diluted EPS | $0.54 | $0.61 | Down $0.07 |
| Tax-equivalent net interest margin | 3.95% | 3.99% | Down 4 basis points |
| Return on average assets | 1.07% | 1.35% | Lower |
| Return on average common equity | 10.04% | 13.39% | Lower |
For the nine months ended September 30, 2017, net income was $64.4 million, or $1.74 diluted EPS, compared with $53.9 million, or $1.56 diluted EPS, in the prior-year period. Tax-equivalent net interest income increased 18.7% to $195.5 million, while the tax-equivalent net interest margin declined to 3.96% from 4.01%.
Management reported adjusted operating net income of $23.6 million, or $0.63 per diluted share, for the third quarter and $68.7 million, or $1.86 per diluted share, for the nine months. These non-GAAP measures exclude specified unusual or management-adjusted items.
Balance sheet, capital, liquidity and cash flow
- Total assets increased to $7.65 billion at September 30, 2017, from $6.89 billion at December 31, 2016.
- Total loans, net of unearned income, increased to $5.96 billion from $5.26 billion. Legacy loans increased approximately $947.9 million, while purchased loans and purchased loan pools declined by $152.1 million and $103.1 million, respectively.
- Total deposits increased to $5.90 billion from $5.58 billion. Loans represented 101.04% of total deposits at September 30, 2017, compared with 94.42% at year-end 2016.
- Other borrowings increased to $808.6 million from $492.3 million, primarily reflecting higher FHLB borrowings and the March 2017 issuance of $75.0 million of subordinated notes.
- Shareholders’ equity increased to $801.9 million from $646.4 million. The company completed a common-stock offering that generated approximately $88.7 million of net proceeds and contributed $110.0 million to the Bank.
- Nine-month operating cash flow was negative $95.7 million, and investing cash flow was negative $534.7 million, primarily due to loan growth. Financing cash flow was positive $675.9 million, resulting in a $45.5 million increase in cash and cash equivalents to $243.9 million.
- At September 30, 2017, the Bank was considered well capitalized under all regulatory capital measurements. The Bank’s Tier 1 leverage, CET1, Tier 1 and total capital ratios were 10.83%, 12.69%, 12.69% and 13.10%, respectively.
- Available liquidity included $347.4 million of FHLB borrowing capacity, $30.0 million under a regional-bank revolving credit agreement, $82.0 million of federal-funds purchasing arrangements and $678.1 million available through the Federal Reserve discount window.
Material changes versus prior comparable periods
- Growth in average earning assets, particularly legacy loans, drove higher interest income and net interest income. Average legacy loans increased 51.1% year over year in the third quarter.
- Funding costs increased as deposit costs and non-deposit funding costs rose. The higher funding costs reduced the net interest margin despite stronger asset yields.
- Third-quarter noninterest income declined due mainly to lower deposit service charges and mortgage banking revenue. Mortgage production was $401.7 million versus $410.8 million, and the gain-on-sale spread declined to 3.30% from 3.69%.
- Third-quarter noninterest expense increased $10.6 million, including higher staffing, data-processing costs, consulting fees and premium-finance operating costs. The largest unusual item was $4.7 million of BSA compliance resolution expenses.
- Credit metrics generally improved: total nonperforming assets declined to $57.6 million from $64.5 million at year-end 2016, and nonperforming assets as a percentage of total assets declined to 0.75% from 0.94%. However, nine-month net charge-offs increased to $3.8 million from $0.5 million, and the provision for loan losses increased to $5.8 million from $2.4 million.
- The allowance for loan losses increased to $26.0 million from $23.9 million, while the allowance ratio declined slightly to 0.44% of total loans from 0.45%.
Guidance, outlook, risks 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.
- Management expects certain BSA compliance-related data-processing and software costs to stabilize, but the Bank remains subject to a December 2016 regulatory consent order requiring enhancements to its Bank Secrecy Act compliance program. The order remains effective until modified, terminated, suspended or set aside.
- Third-quarter results included $4.7 million of BSA compliance resolution expenses, $410,000 of Hurricane Irma expenses, $92,000 of merger and conversion charges and $91,000 of losses on premises sales. Nine-month results included $4.7 million of BSA expenses, $410,000 of Hurricane Irma expenses, $494,000 of merger and conversion charges and $956,000 of premises-sale losses.
- Key credit risks include concentration in real estate lending, exposure to local Southeast real estate conditions, commercial real estate and construction lending, agricultural conditions, consumer installment loans and growth in commercial insurance premium finance loans.
- The company had $1.10 billion of commitments to extend credit, $64.0 million of unused home-equity lines, $13.2 million of standby letters of credit and $113.1 million of mortgage interest-rate lock commitments.
- A former borrower’s lender-liability claim was reversed in Ameris’s favor by the South Carolina Court of Appeals, but the plaintiff sought review by the state Supreme Court. Management considered a loss unlikely and recorded no reserve.
- Future accounting changes include CECL, which management expects will require a one-time cumulative adjustment to the allowance for loan losses upon adoption. The filing does not provide a quantified expected adjustment.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate, construction and premium finance growth, remains within underwriting and concentration limits.
- Whether higher deposit and borrowing costs continue to compress the net interest margin.
- Progress toward satisfying the BSA consent order and whether compliance costs or remediation requirements increase.
- Trends in net charge-offs, criticized loans, nonaccrual loans, troubled debt restructurings and allowance coverage as the portfolio expands.
- The sustainability of mortgage banking production, gain-on-sale spreads and the contribution of the newer Premium Finance Division.
- Liquidity and funding dependence, including the increase in other borrowings and the loans-to-deposits ratio above 100%.
- The eventual impact of CECL and other pending accounting standards on capital, earnings and disclosures.
- All non-GAAP adjusted results should be reconciled to GAAP results and compared carefully with similarly defined measures at other banks.