Ameris Bancorp 2017 Second-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 June 30, 2017, the Bank operated 97 branches in Georgia, Alabama, Florida and South Carolina. Reported results cover the three and six months ended June 30, 2017, compared with the corresponding 2016 periods; balance-sheet comparisons are primarily with December 31, 2016. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net interest income | $63.2 million | $54.6 million | $123.7 million | $105.0 million |
| Noninterest income | $28.2 million | $28.4 million | $53.9 million | $52.7 million |
| Noninterest expense | $55.7 million | $52.4 million | $108.8 million | $108.0 million |
| Provision for loan losses | $2.2 million | $0.9 million | $4.0 million | $1.6 million |
| Net income | $23.1 million | $20.0 million | $44.2 million | $32.4 million |
| Diluted earnings per share | $0.62 | $0.57 | $1.20 | $0.95 |
| Tax-equivalent net interest margin | 3.95% | 4.01% | 3.96% | 4.02% |
| Return on average assets | 1.29% | 1.31% | 1.27% | 1.11% |
| Return on average common equity | 11.95% | 13.08% | 12.13% | 11.24% |
At June 30, 2017, total assets were $7.40 billion, compared with $6.89 billion at December 31, 2016. Total loans, net of unearned income and before the allowance, were $5.67 billion, including $4.23 billion of legacy loans, $950.5 million of purchased loans and $490.1 million of purchased loan pools. Total deposits were $5.79 billion, shareholders’ equity was $782.7 million, and the allowance for loan losses was $25.1 million, or 0.44% of total loans.
Six-month operating cash flow was negative $68.3 million, while investing cash flow was negative $305.5 million and financing cash flow was positive $452.8 million. Cash and cash equivalents increased to $277.3 million from $198.4 million at December 31, 2016. Available liquidity included $560.3 million of FHLB borrowing capacity, $60.0 million under a regional-bank revolving facility and $644.3 million available through the Federal Reserve discount window.
Other borrowings increased to $679.6 million from $492.3 million. The increase included a $75.0 million subordinated-notes offering completed in March 2017; the notes carry a fixed 5.75% rate through March 2022 and mature in 2027. The Bank was considered well capitalized under all regulatory capital measures; its June 30, 2017 Tier 1 leverage, CET1, Tier 1 and total capital ratios were 10.77%, 12.64%, 12.64% and 13.06%, respectively.
Material changes versus prior comparable periods
- Second-quarter net income increased 15.2% year over year, while diluted EPS increased from $0.57 to $0.62. Six-month net income increased 36.7%, and diluted EPS increased from $0.95 to $1.20.
- Six-month net interest income increased 17.8%, principally due to a 21.1% increase in average earning assets. The net interest margin declined from 4.02% to 3.96% as funding costs increased.
- Legacy loans increased $603.4 million, or 16.6%, from year-end 2016. Commercial, financial and agricultural loans, construction and development loans, and commercial real estate loans were the principal contributors.
- Noninterest income was broadly stable, but second-quarter mortgage banking income declined to $13.9 million from $14.1 million as the gain-on-sale spread fell to 3.46% from 3.90% despite higher production.
- Six-month noninterest expense increased only 0.8%, although salaries, data processing and other expenses rose due in part to premium finance expansion, equipment finance staffing, BSA compliance efforts and servicing costs. Merger and conversion charges fell to $402,000 from $6.4 million in the prior-year period.
- Total nonperforming assets declined to $60.1 million, or 0.81% of total assets, from $64.5 million, or 0.94%, at December 31, 2016. Legacy nonaccrual loans declined to $17.1 million from $18.1 million, while legacy net charge-offs increased in the second quarter.
- The company completed a $88.7 million net common-stock offering in March 2017 and contributed $110.0 million to the Bank. It also issued 128,572 shares in exchange for a 4.99% investment in US Premium Finance Holding Company.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific earnings or financial guidance in the filing. Management expects improving economic conditions and increased loan demand to support consistent interest income, but results remain sensitive to interest rates, funding costs, credit performance and mortgage production spreads.
- Credit risk is concentrated in real estate and commercial real estate. CRE loans excluding owner-occupied properties represented 31% of total loans at June 30, 2017, including $560.4 million of construction and development loans and $1.04 billion of nonfarm, nonresidential loans.
- Management identified local and regional real estate conditions, economic downturns, agricultural conditions, commodity prices, weather and natural disasters as potential drivers of loan losses and OREO valuation changes.
- The Bank remains subject to a December 2016 regulatory consent order concerning its Bank Secrecy Act compliance program. Required actions include enhanced oversight, risk assessment, internal controls, customer due diligence, training, staffing, independent testing and review of past account activity. The order remains in effect until modified or terminated.
- Interest-rate risk is managed through ALCO policies, simulation and hedging. Management’s stated tolerance is for net interest income to change no more than 20% over a 24-month period under a 200-basis-point rate movement.
- The filing reports $1.04 billion of commitments to extend credit, $64.6 million of unused home-equity lines, $12.9 million of standby letters of credit, $138.3 million of mortgage rate-lock commitments and $149.3 million of mortgage forward contracts with positive fair value.
- A former borrower’s approximately $2.9 million lender-liability judgment was reversed by the South Carolina Court of Appeals in May 2017. A rehearing petition remained pending; management considered a loss unlikely and recorded no reserve.
- Quarterly adjusted operating net income was $23.5 million versus reported net income of $23.1 million, reflecting $570,000 of pretax losses on premises sales. Six-month adjusted operating net income was $45.1 million versus reported net income of $44.2 million, reflecting merger and conversion charges and premises-sale losses.
Important facts for investors to verify
- Confirm the sustainability of loan growth, particularly in commercial real estate, construction and commercial insurance premium finance loans.
- Monitor the net interest margin and deposit funding costs as interest rates and borrowing levels change.
- Reconcile allowance coverage, net charge-offs, classified loans, nonaccrual loans, troubled debt restructurings and purchased-loan credit marks.
- Track progress toward satisfying the BSA consent order and the related staffing, technology and compliance costs.
- Assess liquidity and capital after considering higher borrowings, off-balance-sheet commitments and the $75.0 million subordinated-notes issuance.
- Evaluate the effect of mortgage production volume and gain-on-sale spreads on noninterest income.
- Review the full Form 10-Q and subsequent filings for developments in the former-borrower litigation, FDIC loss-share obligations and pending accounting standards, including CECL.