Ameris Bancorp - 10-Q quarterly report FY

Activity in the allowance for loan losses for the six months ended June 30, 2007, for the year ended December 31, 2006 and for the six months ended June 30, 2006 is as follows:

Earnings per share have been computed based on the following weighted average number of common shares outstanding for the three months and six months ended June 30, 2007 and 2006:

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.  The Company uses the same credit policies in making commitments and conditional obligations as are used for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company issues standby letters of credit, which are conditional commitments issued to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements and expire in decreasing amounts with terms ranging from one to four years.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary.

The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.  Collateral held may include accounts receivable, inventory, property, plant and equipment, residential real estate, and income-producing commercial properties on those commitments for which collateral is deemed necessary.

The following represent the Company’s commitments to extend credit and standby letters of credit:

Certain of the statements made in this report are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control and which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements.  You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.  These forward-looking statements may not be realized due to a variety of factors, including, without limitation, legislative and regulatory initiatives; additional competition in Ameris’ markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by Ameris; state and federal banking regulations; changes in or application of environmental and other laws and regulations to which Ameris is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in Ameris’ filings with the Securities and Exchange Commission under the Exchange Act.

All written or oral forward-looking statements that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice.  Our forward-looking statements apply only as of the date of this report or the respective date of the document from which they are incorporated herein by reference.  We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made, whether as a result of new information, future events or otherwise.

The following is management’s discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated statement of condition as of June 30, 2007 as compared to December 31, 2006 and operating results for the three-month and six-month periods ended June 30, 2007 as compared to the three-month and six-month periods ended June 30, 2006.  These comments should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.

The Company’s total assets increased $1.5 million from December 31, 2006 to $2.05 billion.  Earning assets increased $12.5 million or 0.67% during the same period.  Short term assets (federal funds sold and interest bearing deposits in banks) decreased $118.9 million due to an increase in loan demand and purchases of investment securities.  Loans increased 7.9%, or $113.9 million, since December 2006, while the investment portfolio increased $17.5 million or 6.2%.  Total deposits decreased by 0.88%, or $15.0 million, due primarily to decreases in brokered deposits that matured and were not replaced.

The growth in the balance sheet and earning assets contributed to solid growth in net interest income.  Net interest income for the three months ended June 30, 2007 increased $657,000 or 3.7%, to $18.3 million compared to the three months ended June 30, 2006. Net interest income for the six months ended June 30, 2007 increased 7.9% to $36.7 million from $34.1 million for the six months ended June 30, 2006.  This increase in net interest income is the result of several factors, the most significant of which are the internal growth in earning assets, effective management of yields on earning assets and efforts to control the Company’s cost of funds.

Return on average equity for the six months ended June 30, 2007 and 2006 was 11.43% and 13.78% respectively, on average equity of $185.2 million and $151.2 million, respectively.  Return on average assets for the six months ended June 30, 2007 and 2006 was 1.04% and 1.21%, respectively.  Decreases in profitability levels are mostly attributable to lower net interest margins.

The following table sets forth unaudited selected financial data for the previous five quarters and for the six-month periods ending June 30, 2007 and 2006.  This data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in this Item 2.

Interest income for the three months ended June 30, 2007 was $35.8 million, an increase of $6.0 million, or 20.2%, compared to $29.8 million for the same period in 2006.  Average earning assets for the three month period increased $276.9 million, or 17.5%, to $1.86 billion as of June 30, 2007, compared to $1.59 billion as of June 30, 2006.  Yield on average earning assets increased to 7.80% from 7.58% for the quarters ended June 30, 2007 and 2006, respectively. The Company’s increase in interest income is primarily attributable to higher levels in prevailing interest rates as well as continued growth from both internal sources and the acquisition of Islands Bancorp on December 31, 2006.

Interest expense on deposits for the three months ended June 30, 2007 was $15.5 million, an increase of $5.6 million from the three months ended June 30, 2006.  Total funding costs for the Company (deposits and wholesale borrowings) increased $5.4 million, or 44.1%, to $17.5 million for the three months ended June 30, 2007, compared to $12.1 million for the three months ended June 30, 2006. Total cost of funding for the Company increased substantially to 3.84% from 3.10% during the second quarter of 2006.  The increase in the cost of funding relates mostly to an aggressive effort by the Company to seize market share in larger, metro markets.  This aggressive position on pricing new deposits periodically influences existing balances and raises the cost of funding by more than just incremental inflows of deposits. The Company’s focus has been largely centered on demand deposits (interest-bearing and non interest-bearing) which have increased to $777.2 million or 25.4% from June 30, 2006.

The provision for loan losses was $936,000 for the three months ended June 30, 2007, compared to $901,000 for the same quarter in 2006.  The amount of provision for loan losses is determined using the Company’s methodology that grades each loan and determines the reserve necessary for the portfolio based on those grades.  Management believes that the present allowance for loan losses is adequate at June 30, 2007.

Non-interest income was $4.6 million for the three months ended June 30, 2007, an increase of $1.1 million from the amount reported in the second quarter of 2006.  Service charges on deposit accounts increased 4.8% to $3.1 million due to higher levels of demand deposits and higher fee structures implemented during the second half of 2006.  Income from mortgage banking activities increased 61.8% to $799,000 during the second quarter of 2007 when compared to the same quarter in 2006.  This increase in mortgage income relates mostly to the placement of additional mortgage loan officers in many of the Company’s markets and increased sales effectiveness from existing mortgage officers from sales training and referral activity in the Bank.

Non-interest expenses for the second quarter of 2007 were $13.8 million, an increase of $1.5 million from the second quarter of 2006.  Salaries and employee benefits increased $1.5 million to $7.5 million during the quarter due to the recent acquisition of Islands Bancorp on December 31, 2006 as well as additional new hires across the Company’s other growth markets.  Occupancy increased slightly to $1.7 million during the second quarter of 2007 from $1.5 million during the same quarter in 2006.  New offices opened during the last half of 2006, as well as expenses associated with office remodeling, have contributed to higher levels of occupancy and equipment expenses.  Other non-interest expenses decreased approximately $231,000 to $4.2 million in the second quarter of 2007 compared to the second quarter in 2006.  These decreases relate mostly to tighter controls over discretionary spending in response to lower levels of net interest margin.

The amount of income tax expense is influenced by the amount of taxable income and the amount of tax-exempt income.  For the three months ended June 30, 2007 and 2006, the provision for taxes was $2.9 million and $2.7 million, respectively.  The effective tax rates for the three months ended June 30, 2007 and 2006 was 34.9% and 33.7%, respectively.

Interest income for the six months ended June 30, 2007 was $71.3 million, an increase of $14.3 million, or 25.1%, compared to $57.0 million for the same period in 2006. Average earning assets for the six- month period increased $276.9 million, or 17.5%, to $1.86 billion as of June 30, 2007 compared to $1.59 billion as of June 30, 2006. Yield on average earning assets increased 64 basis points to 7.83% from 7.36% for the six months ended June 30, 2007 and 2006, respectively.

Interest expense on deposits and other borrowings for the six months ended June 30, 2007 was $34.5 million, an $11.6 million, or 50.7%, increase from June 30, 2006. While average interest bearing liabilities increased $261.4 million, or 19.1% to $1.63 billion for the six months ended June 30, 2007 compared to $1.37 billion for the six months ended June 30, 2006, the yield on average interest bearing liabilities increased 89 basis points to 4.27% from 3.38% as of June 30, 2007 and 2006, respectively. The increases in interest expense are driven primarily by a higher interest rate environment and a more aggressive stance on deposit sales.

Net interest income for the six months ended June 30, 2007 increased $2.7 million, or 7.9%, to $36.7 million compared to $34.0 million for the same period ending June 30, 2006. The Company’s net interest margin decreased to 4.07% for the six months ended June 30, 2007 compared to 4.41% as of June 30, 2006.

The provision for loan losses was unchanged at $1.4 million for the six months ended June 30, 2007 as compared to the same period in 2006. Total non-performing assets increased to $18.3 million at June 30, 2007 from $9.3 million at June 30, 2006.  For the six month period ending June 30, 2007, Ameris had net charge-offs of $1.3 million compared to $339,000 for the same period in 2006.  Changes in credit quality are discussed further under the heading "Loans and Allowance for Loan Losses".

Non-interest income for the first six months of 2007 was up $1.7 million, or 23.4%, compared to the same time period a year ago.  Service charges on deposit accounts increased 6.8%, or $379,000 due to higher number of deposit accounts.  Mortgage banking activities include origination fees, service release premiums and the gain on the sales of mortgage loans held-for-sale. Mortgage banking activities for the six months ended June 30, 2007 totaled $1.5 million, an increase of $534,000 or 56.4%, compared to $948,000 in the six months ended June 30, 2006.  During the second quarter of 2006, the Company recognized a $315,000 loss on the sale of securities to restructure a portion of the investment portfolio with no similar gain or loss during 2007.

 

Non-interest expense for the first six months of 2007 was $28.2 million.  This represents a $3.8 million increase over the prior year period which totaled $24.4 million.  The increase in non-interest expense is attributable to salaries and employee benefits increasing $2.6 million, net occupancy and equipment increasing $497,000, amortization expense increasing $208,000 and other expense increasing $581,000.

At June 30, 2007, Ameris had 604 full-time equivalent employees compared to 585 full-time equivalent employees at June 30, 2006.  The Company continues to be successful in its efforts to hire seasoned professionals in production and management positions. Recruiting efforts were successful in Jacksonville, Florida with the hiring of commercial lending and mortgage bankers to staff the Company’s new branch that opened December 1, 2006. Initial efforts also were successful in South Carolina as Ameris hired several very seasoned bankers to lead the Company’s efforts in both the greater Columbia and Charleston markets. The Company is also continuing its efforts to expand production capacity and build greater market share in its larger, more metropolitan markets while reducing the number of back office and non-customer contact roles.

Salaries and employee benefits for the six months ended June 30, 2007 were $2.6 million higher than during the same period in 2006.  The majority of this increase is attributable to the acquisition of Islands Bancorp on December 31, 2006, as well as additional new hires across the Company’s other growth markets.

Occupancy and equipment expense increased $497,000 to $3.4 million for the six months ended June 30, 2007 as compared to the same period of 2006. New offices opened during the last half of 2006, as well as limited remodeling expenses, contributed to higher levels of occupancy and equipment expenses.

Other expenses for the six months ended June 30, 2007 increased $581,000 when compared to the same time period for 2006.  Most of this increase is attributable to additional expenses related to the new presence in South Carolina.

The Company’s efficiency ratio (operating expenses as a percent of total revenue) increased to 59.98% for the six months ended June 30, 2007 from 58.75% for the six months ended June 30, 2006.

The amount of income tax expense is influenced by the amount of taxable income and the amount of tax-exempt income. For the six months ended June 30, 2007 and 2006, the provision for taxes was $5.9 million and $5.3 million, respectively. The effective tax rate for the six months ended June 30, 2007 was 36.0% compared to 33.7% for the same period in 2006.

Capital management consists of providing equity to support both current and anticipated future operations.  The Company is subject to capital adequacy requirements imposed by the Federal Reserve Board (the “FRB”) and the Georgia Department of Banking and Finance (the “GDBF”), and the Bank is subject to capital adequacy requirements imposed by the Federal Deposit Insurance Corporation (the “FDIC”), and the GDBF.

The FRB, the FDIC, and the GDBF have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy.  These standards define and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk.  The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks and to account for off-balance sheet exposure.

The minimum requirements established by the regulators are set forth in the table below, along with the actual ratios at June 30, 2007 and 2006.