Ameris Bancorp quarterly report, Q3 FY2019

Ameris Bancorp 2019 Third-Quarter Form 10-Q Summary

Business Context and Reporting Period

Ameris Bancorp is an Atlanta-based financial holding company operating primarily through Ameris Bank. At September 30, 2019, the Bank operated 172 branches in Georgia, Florida, Alabama and South Carolina. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods, and is unaudited.

The July 1, 2019 acquisition of Fidelity Southern Corporation materially expanded Ameris's scale, adding 62 branches and approximately $4.78 billion of assets, $3.51 billion of loans and $4.04 billion of deposits at acquisition. Ameris issued 22.2 million common shares valued at $869.3 million and recorded $410.3 million of goodwill.

Key Financial Metrics

Metric	Three Months Ended September 30	Nine Months Ended September 30
Net interest income	$148.8 million, versus $99.0 million	$349.8 million, versus $243.8 million
Noninterest income	$77.0 million, versus $30.2 million	$143.0 million, versus $87.9 million
Provision for loan losses	$6.0 million, versus $2.1 million	$14.1 million, versus $13.0 million
Noninterest expense	$192.7 million, versus $72.4 million	$349.4 million, versus $217.8 million
Net income	$21.4 million, versus $41.4 million	$100.2 million, versus $77.5 million
Diluted earnings per share	$0.31, versus $0.87	$1.83, versus $1.85
Adjusted net income	$68.5 million, or $0.98 per diluted share	$156.3 million, or $2.85 per diluted share
Tax-equivalent net interest margin	3.84%, versus 3.92%	3.89%, versus 3.93%

Adjusted results exclude primarily merger and conversion costs, restructuring and other unusual items. The filing does not present a conventional revenue figure; the principal revenue components are net interest income and noninterest income.

Total assets were $17.76 billion at September 30, 2019, compared with $11.44 billion at December 31, 2018.
Total loans, net of unearned income, were $12.83 billion, compared with $8.51 billion at year-end 2018. Loans held for sale were $1.19 billion, compared with $111.3 million.
Total deposits were $13.66 billion, compared with $9.65 billion. Other borrowings increased to $1.35 billion from $151.8 million.
Shareholders' equity was $2.42 billion, compared with $1.46 billion. Book value per common share was $34.78 and tangible book value per common share was $20.29.
Cash and cash equivalents were $479.7 million, compared with $679.5 million at December 31, 2018.
The Bank was considered well capitalized under all regulatory capital measures. At September 30, 2019, the Bank's CET1, Tier 1 leverage and total capital ratios were 11.42%, 10.03% and 12.20%, respectively.

Cash Flow, Debt and Liquidity

For the first nine months of 2019, operating activities used $587.3 million of cash, investing activities used $580.0 million, and financing activities provided $967.5 million. Cash and cash equivalents decreased $199.8 million to $479.7 million.
Liquidity included $1.72 billion of available FHLB borrowing capacity, $1.24 billion available through the Federal Reserve discount window, $30.0 million available under a revolving credit arrangement and $157.0 million of federal funds purchase capacity.
Loans, net of unearned income, represented 93.90% of total deposits at September 30, 2019. Management stated that liquidity ratios were satisfactory and that it was aware of no events or trends likely to cause a material change in liquidity.
Subordinated deferrable interest debentures totaled $127.1 million. A $37.1 million interest-rate swap, maturing in September 2020, converted variable-rate exposure on certain debentures to a fixed rate.

Material Changes Versus Prior Comparable Period

Net income declined 48.4% in the third quarter despite substantial growth in net interest income and noninterest income, primarily because merger and conversion charges rose to $65.2 million from $276,000.
Nine-month net income increased 29.3%, but diluted EPS declined slightly because the share count increased substantially following the Fidelity acquisition. Adjusted net income increased to $156.3 million from $100.3 million.
Third-quarter mortgage production increased to $1.8 billion from $479.1 million, and mortgage banking income increased to $53.0 million from $14.1 million. The mortgage open pipeline was $784.2 million at quarter-end.
Average interest-earning assets increased 52.7% in the third quarter and 44.4% for the nine-month period, driven by acquisitions and organic loan growth. The net interest margin declined modestly as funding costs increased.
Noninterest expense increased sharply because of Fidelity-related merger costs, higher staffing, incentive compensation, occupancy, systems and intangible amortization costs. Full-time equivalent employees increased to 2,906 from 1,847 a year earlier, and branches increased to 172 from 125.
The allowance for loan losses increased to $35.5 million from $28.8 million, while the allowance ratio declined to 0.28% of total loans from 0.34% because of portfolio growth.
Total nonperforming assets increased to $128.8 million, or 0.73% of total assets, from $63.0 million, or 0.55%. Management attributed the increase primarily to assets acquired from Fidelity.

Outlook, Commentary, Risks and Unusual Items

Management did not provide formal earnings or revenue guidance in the filing. Results for the nine months are not necessarily indicative of full-year results.
Management expects to adopt the current expected credit loss, or CECL, standard on January 1, 2020. The adoption is expected to produce a one-time cumulative adjustment to equity and the allowance for loan losses, but the amount was not yet determined. Modeling and third-party validation were still underway.
Management identified integration of acquired businesses, realization of expected cost savings and revenue synergies, interest-rate movements, competition, regulatory changes, economic conditions, market liquidity, weather and catastrophic events as material forward-looking risks.
Credit risks include concentration in real estate lending and exposure to changing real estate conditions in the Southeast. CRE loans excluding owner-occupied properties were $4.03 billion, or 31% of total loans, at September 30, 2019.
The quarter included $65.2 million of merger and conversion charges, a $4.3 million gain on bank-owned life insurance proceeds, a $1.3 million servicing-right recovery and $889,000 of losses on premises. The nine-month period included $70.7 million of merger and conversion charges, $4.3 million of BOLI gains and $4.6 million of premises-sale losses.
The company authorized a new $100.0 million common-stock repurchase program through October 31, 2020. No shares had been repurchased under the new program by September 30, 2019.
Management reported no material changes to the risk factors in the 2018 Form 10-K and stated that pending legal matters were not expected to have a material adverse effect, while noting that outcomes could still be material for a particular period.

Investor Verification Checklist

Verify the final purchase accounting for Fidelity, including potential refinements to loan marks, deposits, intangibles, deferred taxes and the $410.3 million goodwill balance.
Monitor CECL adoption impacts on equity, the allowance for loan losses, provision expense and regulatory capital beginning January 1, 2020.
Assess whether mortgage production and the $784.2 million pipeline are sustainable and whether gain-on-sale spreads remain under pressure.
Track nonperforming assets, purchased-loan performance and real estate concentrations, particularly after Fidelity integration.
Evaluate the effect of higher deposit and wholesale funding costs on the 3.84% quarterly net interest margin.
Reconcile reported earnings with adjusted earnings and determine whether merger and conversion costs decline as integration progresses.
Confirm execution of the $100.0 million repurchase authorization and its effect on tangible book value, capital ratios and per-share results.