UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2011
OR
Commission File Number: 001-13901
AMERIS BANCORP
(Exact name of registrant as specified in its charter)
310 FIRST STREET, S.E., MOULTRIE, GA 31768
(Address of principal executive offices)
(229) 890-1111
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ¨ No x
There were 23,751,794 shares of Common Stock outstanding as of November 3, 2011.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets at September 30, 2011, December 31, 2010 and September 30, 2010
Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Month Periods Ended September 30, 2011 and 2010
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010
Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Item 4.
Controls and Procedures.
PART II – OTHER INFORMATION
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Defaults Upon Senior Securities.
(Removed and Reserved).
Item 5.
Other Information.
Item 6.
Exhibits.
Signatures
Item 1. Financial Statements.
AMERIS BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
Assets
Cash and due from banks
Federal funds sold and interest bearing accounts
Investment securities available for sale, at fair value
Other investments
Mortgage loans held for sale, at fair value
Loans
Covered loans
Less: allowance for loan losses
Loans, net
Other real estate owned
Covered other real estate owned
Total other real estate owned
FDIC indemnification asset
Premises and equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase
Other borrowings
Other liabilities
Subordinated deferrable interest debentures
Total liabilities
Commitments and contingencies
Stockholders’ Equity
Preferred stock, stated value $1,000; 5,000,000 shares authorized; 52,000 shares issued
Common stock, par value $1; 30,000,000 shares authorized; 25,078,968, 24,982,911 and 24,961,239 shares issued
Capital surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost, 1,336,174 shares
Total stockholders’ equity
Total liabilities and stockholders’ equity
See notes to unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(dollars in thousands, except per share data)
(Unaudited)
Interest income
Interest and fees on loans
Interest on taxable securities
Interest on nontaxable securities
Interest on deposits in other banks and federal funds sold
Total interest income
Interest expense
Interest on deposits
Interest on other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Service charges on deposit accounts
Mortgage banking activity
Other service charges, commissions and fees
Gain on acquisitions
Gain on sale of securities
Other noninterest income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Equipment and occupancy expenses
Amortization of intangible assets
Data processing and telecommunications expenses
Advertising and marketing expenses
Other non-interest expenses
Total noninterest expense
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Other comprehensive income
Unrealized holding gain arising during period on investment securities available for sale, net of tax
Unrealized loss on cash flow hedges arising during period, net of tax
Reclassification adjustment for gains included in operations, net of tax
Comprehensive income (loss)
Basic earnings/(loss) per share
Diluted earnings/(loss) per share
Weighted Average Common Shares Outstanding
Basic
Diluted
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
PREFERRED STOCK
Balance at beginning of period
Accretion of fair value of warrant
Issued at end of period
COMMON STOCK
Issued at beginning of period
Issuance of common stock
Issuance of restricted shares
Cancellation of restricted shares
Proceeds from exercise of stock options
CAPITAL SURPLUS
Stock-based compensation
Balance at end of period
RETAINED EARNINGS
Net income /(loss)
Dividends on preferred shares
Cash dividends on common shares
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX
Unrealized gains (losses) on securities and derivatives:
TREASURY STOCK
Purchase of treasury shares
TOTAL STOCKHOLDERS’ EQUITY
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Adjustments reconciling net income (loss) to net cash provided by operating activities:
Depreciation
Net gains on sale or disposal of premises and equipment
Net losses or write-downs on sale of other real estate owned
Provision for deferred taxes
Net gains on securities available for sale
Net increase in mortgage loans held for sale
Change in prepaid FDIC assessment
Change in other prepaids, deferrals and accruals, net
Net cash provided by operating activities
Cash Flows From Investing Activities:
Net (increase)/decrease in federal funds sold and interest bearing deposits
Proceeds from maturities of securities available for sale
Purchase of securities available for sale
Proceeds from sales of securities available for sale
Net decrease in loans
Proceeds from sales of other real estate owned
Proceeds from sales of premises and equipment
Purchases of premises and equipment
Decrease in FDIC indemnification asset
Cash received (paid) in FDIC-assisted acquisitions
Net cash provided by (used in) investing activities
Cash Flows From Financing Activities:
Net decrease in deposits
Net decrease in securities sold under agreements to repurchase
Decrease in other borrowings
Dividends paid - preferred stock
Dividends paid - common stock
Net cash used in financing activities
Net decrease in cash and due from banks
Cash and due from banks at beginning of period
Cash and due from banks at end of period
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
NOTE 1 – BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Ameris Bancorp (the “Company” or “Ameris”) is a financial holding company headquartered in Moultrie, Georgia. Ameris conducts substantially all of its operations through its wholly-owned banking subsidiary, Ameris Bank (the “Bank”). At September 30, 2011, the Bank operated 62 branches in select markets in Georgia, Alabama, Florida and South Carolina. Our business model capitalizes on the efficiencies of a large financial services company while still providing the community with the personalized banking service expected by our customers. We manage our Bank through a balance of decentralized management responsibilities and efficient centralized operating systems, products and loan underwriting standards. Ameris’ Board of Directors and senior managers establish corporate policy, strategy and administrative policies. Within Ameris’ established guidelines and policies, the banker closest to the customer responds to the differing needs and demands of their unique market.
The accompanying unaudited consolidated financial statements for Ameris have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. The interim consolidated financial statements included herein are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the period ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto and the report of our registered independent public accounting firm included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Certain amounts reported for the periods ended December 31, 2010 and September 30, 2010 have been reclassified to conform to the presentation as of September 30, 2011. These reclassifications had no effect on previously reported net income or stockholders’ equity.
Newly Adopted Accounting Pronouncements
ASU 2011-01 - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20(“ASU 2011-01”). ASU 2011-01 temporarily delayed the effective date of the disclosures surrounding troubled debt restructurings in Update 2010-20 for public companies. The Financial Accounting Standards Board (“FASB”) deliberated on what constitutes a troubled debt restructuring and coordinated that guidance with the effective date of the new disclosures, which are effective for interim and annual periods ending after June 15, 2011. It did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2011-02 - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU 2011-02”). ASU 2011-02 provides additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011, and is to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying ASU 2011-02, an entity may identify receivables that are newly considered impaired. It did not have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2011-04 - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 generally represents clarifications of Topic 820, but also includes some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. ASU 2011-04 results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements. ASU 2011-04 is to be applied prospectively and is effective during interim and annual periods beginning after December 15, 2011 for public companies. It is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
ASU 2011-05 -Amendments to Topic 220, Comprehensive Income (“ASU 2011-05”). ASU 2011-05 grants an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. For public entities, ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and is to be adopted retrospectively. It is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
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ASU 2011-08 – Intangibles – Goodwill and Other (Topic 350) Testing Goodwill for Impairment(“ASU 2011-08”). ASU 2011-08 grants an entity the option to assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This conclusion can be used as a basis for determining whether it is necessary to perform the two-step goodwill impairment test required in Topic 350. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. It is not expected to have a material impact on the Company’s results of operations, financial position or disclosures.
Fair Value of Financial Instruments
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The accounting standard for disclosures about the fair value of financial instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The fair value hierarchy describes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments and other accounts recorded based on their fair value:
Cash and Due From Banks, Federal Funds Sold and Interest-Bearing Accounts: The carrying amount of cash and due from banks, federal funds sold and interest-bearing accounts approximates fair value.
Investment Securities Available for Sale: The fair value of securities available for sale is determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Level 2 securities include mortgage-backed securities issued by government sponsored enterprises and municipal bonds. The level 2 fair value pricing is provided by an independent third-party and is based upon similar securities in an active market. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain residual municipal securities and other less liquid securities.
Other Investments: Federal Home Loan Bank (“FHLB”) stock is included in other investments at its original cost basis, as cost approximates fair value and there is no ready market for such investments.
Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted expected future cash flows or underlying collateral values, where applicable. A loan is determined to be impaired if the Company believes it is probable that all principal and interest amounts due according to the terms of the loan will not be collected as scheduled. The fair value of impaired loans is determined in accordance with accounting standards and generally results in a specific reserve established through a charge to the provision for loan losses. Losses on impaired loans are charged to the allowance when management believes the uncollectability of a loan is confirmed. Management has determined that the majority of impaired loans are Level 2 assets due to the extensive use of market appraisals. To the extent that market appraisals or other methods do not produce reliable determinations of fair value, these assets are deemed to be Level 3.
Other Real Estate Owned: The fair value of other real estate owned (“OREO”) is determined using certified appraisals that value the property at its highest and best uses by applying traditional valuation methods common to the industry. The Company does not hold any OREO for profit purposes and all other real estate is actively marketed for sale. In most cases, management has determined that additional write-downs are required beyond what is calculable from the appraisal to carry the property at levels that would attract buyers. Because this additional write-down is not based on observable inputs, management has determined that other real estate owned should be classified as Level 3.
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Covered Assets: Covered assets include loans and other real estate owned on which the majority of losses would be covered by loss-sharing agreements with the Federal Deposit Insurance Corporation (the “FDIC”). Management initially valued these assets at fair value using mostly unobservable inputs and, as such, has classified these assets as Level 3.
Intangible Assets and Goodwill: Intangible assets consist of core deposit premiums acquired in connection with business combinations and are based on the established value of acquired customer deposits. The core deposit premium is initially recognized based on a valuation performed as of the consummation date and is amortized over an estimated useful life of three to ten years. Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill and other intangible assets deemed to have an indefinite useful life are not amortized but instead are subject to an annual review for impairment.
FDIC Loss-Share Receivable: Because the FDIC will reimburse the Company for certain acquired loans should the Company experience a loss, an indemnification asset is recorded at fair value at the acquisition date. The indemnification asset is recognized at the same time as the indemnified loans and measured on the same basis, subject to collectability or contractual limitations. The shared- loss agreements on the acquisition date reflect the reimbursements expected to be received from the FDIC, using an appropriate discount rate which reflects counterparty credit risk and other uncertainties. The shared-loss agreements continue to be measured on the same basis as the related indemnified loans, and the loss-share receivable is impacted by changes in estimated cash flows associated with these loans.
Deposits: The carrying amount of demand deposits, savings deposits and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently offered for certificates with similar maturities.
Securities Sold under Agreements to Repurchase and Other Borrowings: The carrying amount of variable rate borrowings and securities sold under repurchase agreements approximates fair value. The fair value of fixed rate other borrowings is estimated based on discounted contractual cash flows using the current incremental borrowing rates for similar borrowing arrangements.
Subordinated Deferrable Interest Debentures: The carrying amount of the Company’s variable rate trust preferred securities approximates fair value.
Off-Balance-Sheet Instruments: Because commitments to extend credit and standby letters of credit are typically made using variable rates and have short maturities, the carrying value and fair value are immaterial for disclosure.
Derivatives: The Company has entered into derivative financial instruments to manage interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivatives. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair value of the derivatives are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves derived from observable market interest rate curves).
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting any applicable credit enhancements such as collateral postings, thresholds, mutual puts and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself or the counterparty. However, as of September 30, 2011, December 31, 2010 and September 30, 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuation in its entirety is classified in Level 2 of the fair value hierarchy.
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The carrying amount and estimated fair value of the Company’s financial instruments, not shown elsewhere in these financial instruments, were as follows:
Financial assets:
Financial liabilities:
Deposits
The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall as of September 30, 2011 and 2010 and December 31, 2010 (dollars in thousands):
U.S. government agencies
State, county and municipal securities
Corporate debt securities
Mortgage backed securities
Total recurring assets at fair value
Derivative financial instruments
8
The following table is a summary of instruments measured at fair value on a nonrecurring basis, using the valuation hierarchy as of September 30, 2011 and 2010 and December 31, 2010 (dollars in thousands):
Impaired loans carried at fair value
Total non-recurring assets at fair value
Total nonrecurring assets at fair value
Below is the Company’s reconciliation of Level 3 assets as of September 30, 2011. Gains or losses on impaired loans are recorded in the provision for loan losses.
Beginning balance January 1, 2011
Total gains/(losses) included in net income
Purchases, sales, issuances, and settlements, net
Transfers in or out of Level 3
Ending balance September 30, 2011
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NOTE 2 – INVESTMENT SECURITIES
Ameris’ investment policy blends the Company’s liquidity needs and interest rate risk management with its desire to increase income and provide funds for expected growth in loans. The investment securities portfolio consists primarily of U.S. government sponsored mortgage-backed securities and agencies, state, county and municipal securities and corporate debt securities. Ameris’ portfolio and investing philosophy concentrate activities in obligations where the credit risk is limited. For the small portion of Ameris’ portfolio found to present credit risk, the Company has reviewed the investments and financial performance of the obligors and believes the credit risk to be acceptable.
Management and the Company’s Asset and Liability Committee (the “ALCO Committee”) evaluate securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. While the majority of the unrealized losses on debt securities relate to changes in interest rates, corporate debt securities have also been affected by reduced levels of liquidity and higher risk premiums. Occasionally, management engages independent third parties to evaluate the Company’s position in certain corporate debt securities to aid management and the ALCO Committee in its determination regarding the status of impairment. The Company believes that each investment poses minimal credit risk and, further, that the Company does not intend to sell these investment securities at an unrealized loss position at September 30, 2011, and it is more likely than not that the Company will not be required to sell these securities prior to recovery or maturity. Therefore, at September 30, 2011, these investments are not considered impaired on an other-than temporary basis.
The amortized cost and estimated fair value of investment securities available for sale at September 30, 2011, December 31, 2010 and September 30, 2010 are presented below:
September 30, 2011:
U. S. government agencies
Mortgage-backed securities
Total securities
December 31, 2010:
September 30, 2010:
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The amortized cost and fair value of available-for-sale securities at September 30, 2011 by contractual maturity are summarized in the table below. Expected maturities for mortgage-backed securities may differ from contractual maturities because in certain cases borrowers can prepay obligations without prepayment penalties. Therefore, these securities are not included in the following maturity summary:
Due in one year or less
Due from one year to five years
Due from five to ten years
Due after ten years
Securities with a carrying value of approximately $177.6 million serve as collateral to secure public deposits and other purposes required or permitted by law at September 30, 2011.
The following table details the gross unrealized losses and fair value of securities aggregated by category and duration of continuous unrealized loss position at September 30, 2011, December 31, 2010 and September 30, 2010.
Total temporarily impaired securities
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NOTE 3 – LOANS
The Company engages in a full complement of lending activities, including real estate-related loans, agriculture-related loans, commercial and financial loans and consumer installment loans within select markets in Georgia, Alabama, Florida and South Carolina. Ameris concentrates the majority of its lending activities in real estate loans. While risk of loss in the Company’s portfolio is primarily tied to the credit quality of the various borrowers, risk of loss may increase due to factors beyond Ameris’ control, such as local, regional and/or national economic downturns. General conditions in the real estate market may also impact the relative risk in the real estate portfolio.
Commercial, financial and agricultural loans include both secured and unsecured loans for working capital, expansion, crop production, and other business purposes. Short-term working capital loans are secured by non-real estate collateral such as accounts receivable, crops, inventory and equipment. The Company evaluates the financial strength, cash flow, management, credit history of the borrower and the quality of the collateral securing the loan. The Bank often requires personal guarantees and secondary sources of repayment on commercial, financial and agricultural loans.
Real estate loans include construction and development loans, commercial and farmland loans and residential loans. Construction and development loans include loans for the development of residential neighborhoods, construction of one-to-four family residential construction loans to builders and consumers, and commercial real estate construction loans, primarily for owner-occupied properties. The Company limits its construction lending risk through adherence to established underwriting procedures. Commercial real estate loans include loans secured by owner-occupied commercial buildings for office, storage, retail, farmland and warehouse space. They also include non-owner occupied commercial buildings such as leased retail and office space. Commercial real estate loans may be larger in size and may involve a greater degree of risk than one-to-four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties. The Company’s residential loans represent permanent mortgage financing and are secured by residential properties located within the Bank’s market areas.
Consumer installment loans and other loans include automobile loans, boat and recreational vehicle financing, and both secured and unsecured personal loans. Consumer loans carry greater risks than other loans, as the collateral can consists of rapidly depreciating assets such as automobiles and equipment that may not provide an adequate source of repayment of the loan in the case of default.
Loans are stated at unpaid balances, net of unearned income and deferred loan fees. Balances within the major loans receivable categories are presented in the following table:
Commercial, financial and agricultural
Real estate – construction and development
Real estate – commercial and farmland
Real estate – residential
Consumer installment
Other
Covered loans are defined as loans that were acquired in FDIC-assisted transactions that are covered by a loss-sharing agreement with the FDIC. Covered loans totaling $595.4 million, $555.0 million and $185.3 million at September 30, 2011, December 31, 2010 and September 30, 2010, respectively, are not included in the above schedule.
Covered loans are shown below according to loan type as of the end of the periods shown:
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Nonaccrual and Past Due Loans
A loan is placed on nonaccrual status when, in management’s judgment, the collection of the interest income appears doubtful. Interest receivable that has been accrued and is subsequently determined to have doubtful collectability is charged to interest income. Interest on loans that are classified as non-accrual is recognized when received. Past due loans are loans whose principal or interest is past due 90 days or more. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original contractual terms.
The following table presents an analysis of non-covered loans accounted for on a nonaccrual basis:
The following table presents an analysis of covered loans accounted for on a nonaccrual basis:
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The following table presents an analysis of non-covered past due loans as of September 30, 2011 and December 31, 2010:
As of September 30, 2011:
Commercial, financial & agricultural
Real estate – construction & development
Real estate – commercial & farmland
Consumer installment loans
Total
As of December 31, 2010:
There was no material amount of non-covered loans past due ninety days or more and still accruing interest at September 30, 2010.
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The following table presents an analysis of covered past due loans as of September 30, 2011 and December 31, 2010:
Impaired Loans
Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. When determining if the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considers the borrower’s capacity to pay, which includes such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. Impaired loans include loans on nonaccrual status and troubled debt restructurings. The Company individually assesses for impairment all non-accrual loans greater than $200,000 and rated substandard or worse and all troubled debt restructurings greater than $100,000. If a loan is deemed impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.
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The following is a summary of information pertaining to non-covered impaired loans:
Nonaccrual loans
Troubled debt restructurings not included above
Total impaired loans
Impaired loans not requiring a related allowance
Impaired loans requiring a related allowance
Allowance related to impaired loans
Average investment in impaired loans
Interest income recognized on impaired loans
Foregone interest income on impaired loans
The following table presents an analysis of information pertaining to non-covered impaired loans as of September 30, 2011 and December 31, 2010:
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The following is a summary of information pertaining to covered impaired loans:
The following table presents an analysis of information pertaining to covered impaired loans as of September 30, 2011 and December 31, 2010:
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Credit Quality Indicators
The Company uses a nine category risk grading system to assign a risk grade to each loan in the portfolio. The following is a description of the general characteristics of the grades:
Grade 10 – Prime Credit – This grade represents loans to the Company’s most creditworthy borrowers or loans that are secured by cash or cash equivalents.
Grade 15 – Good Credit – This grade includes loans that exhibit one or more characteristics better than that of a Satisfactory Credit. Generally, debt service coverage and borrower’s liquidity is materially better than required by the Company’s loan policy.
Grade 20 – Satisfactory Credit – This grade is assigned to loans to borrowers who exhibit satisfactory credit histories, contain acceptable loan structures and demonstrate ability to repay.
Grade 25 – Minimum Acceptable Credit – This grade includes loans which exhibit all the characteristics of aSatisfactory Credit, but warrant more than normal level of banker supervision due to: (i) circumstances which elevate the risks of performance (such as start-up operations, untested management, heavy leverage, interim losses); (ii) adverse, extraordinary events that have affected, or could affect, the borrower’s cash flow, financial condition, ability to continue operating profitability or refinancing (such as death of principal, fire, divorce); (iii) loans that require more than the normal servicing requirements (such as any type of construction financing, acquisition and development loans, accounts receivable or inventory loans and floor plan loans); (iv) existing technical exceptions which raise some doubts about the Bank’s perfection in its collateral position or the continued financial capacity of the borrower; or (v) improvements in formerly criticized borrowers, which may warrant banker supervision.
Grade 28 – Performing, Under-Collateralized Credit – This grade is assigned to loans that are currently performing and supported by adequate financial information that reflects repayment capacity but exhibits a loan-to-value ratio greater than 110%, based on a documented collateral valuation.
Grade 30 – Other Asset Especially Mentioned – This grade includes loans that exhibit potential weaknesses that deserve management’s close attention. If left uncorrected, these weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date.
Grade 40 – Substandard – This grade represents loans which are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged, if any. These assets exhibit a well-defined weakness or are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. These weaknesses may be characterized by past due performance, operating losses or questionable collateral values.
Grade 50 – Doubtful – This grade includes loans which exhibit all of the characteristics of a substandard loan with the added provision that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable or improbable.
Grade 60 – Loss – This grade is assigned to loans which are considered uncollectible and of such little value that their continuance as active assets of the Bank is not warranted. This classification does not mean that the loss has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing it off.
The following table presents the non-covered loan portfolio by risk grade as of September 30, 2011:
Risk Grade
20
25
28
30
40
50
60
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The following table presents the non-covered loan portfolio by risk grade as of December 31, 2010:
The following table presents the covered loan portfolio by risk grade as of September 30, 2011:
The following table presents the covered loan portfolio by risk grade as of December 31, 2010:
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Troubled Debt Restructurings
The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the borrower is experiencing financial difficulties and (ii) the Company has granted a concession that it would not otherwise consider. Concessions may include interest rate reductions to below market interest rates, principal forgiveness, restructuring amortization schedules and other actions intended to minimize potential losses. The Company has exhibited the greatest success for rehabilitation of the loan by a reduction in the rate alone (maintaining the amortization of the debt) or a combination of a rate reduction and the forbearance of previously past due interest or principal. This has most typically been evidenced in certain commercial real estate loans whereby a disruption in the borrower’s cash flow resulted in an extended past due status, of which the borrower was unable to catch up completely as the cash flow of the property ultimately stabilized at a level lower than its original level. A reduction in rate, coupled with a forbearance of unpaid principal and/or interest, allowed the net cash flows to service the debt under the modified terms.
The Company’s policy requires a restructure request to be supported by a current, well-documented credit evaluation of the borrower’s financial condition and a collateral evaluation that is no older than six-months from the date of the restructure. Key factors of that evaluation include the documentation of current, recurring cash flows, support provided by the guarantor(s) and the current valuation of the collateral. If the appraisal in file is older than six-months, an evaluation must be made as to the continued reasonableness of the valuation. For certain income-producing properties, current rent rolls and/or other income information can be utilized to support the appraisal valuation, when coupled with documented cap rates within our markets and a physical inspection of the collateral to validate the current condition.
The Company’s policy states in the event a loan has been identified as a troubled debt restructuring, it should be assigned a grade of substandard and placed on nonaccrual status until such time that the borrower has demonstrated the ability to service the loan payments based on the restructured terms – generally defined as six-months of satisfactory payment history. Missed payments under the original loan terms are not considered under the new structure; however, subsequent missed payments are considered non-performance and are not considered toward the six-month required term of satisfactory payment history. The Company’s loan policy states that a nonaccrual loan may be returned to accrual status when (i) none of its principal and interest is due and unpaid, and the Company expects repayment of the remaining contractual principal and interest, or (ii) when it otherwise becomes well secured and in the process of collection. Restoration to accrual status on any given loan must be supported by a well-documented credit evaluation of the borrower’s financial condition and the prospects for full repayment, approved by the Company’s Senior Credit Officer.
In the normal course of business, the Company renews loans with a modification of the interest rate or terms that are not deemed as troubled debt restructurings because the borrower is not experiencing financial difficulty. The Company modified loans in the first nine months of 2011 totaling $27.0 million and loans in 2010 totaling $23.8 million under such parameters. In addition, the Company offers consumer loan customers an annual skip-a-pay program that is based on certain qualifying parameters and not based on financial difficulties. The Company does not treat these as troubled debt restructurings.
The following table presents the amount of troubled debt restructurings by loan class, classified separately as accrual and non-accrual at September 30, 2011 and December 31, 2010.
Loan class:
Real estate - residential
The following table presents the amount of troubled debt restructurings by types of concessions made, classified separately as accrual and non-accrual at September 30, 2011 and December 31, 2010.
Type of Concession:
Forbearance of Interest
Forgiveness of Principal
Payment Modification Only
Rate Reduction Only
Rate Reduction, Forbearance of Interest
Rate Reduction, Forbearance of Principal
Rate Reduction, Payment Modification
The following table presents the amount of troubled debt restructurings by collateral types, classified separately as accrual and non-accrual at September 30, 2011 and December 31, 2010.
Collateral type:
Apartments
Raw Land
Hotel & Motel
Office
Retail, including Strip Centers
1-4 Family Residential
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As of September 30, 2011 and December 31, 2010, the Company had a balance of $23.6 million and $27.4 million, respectively, in troubled debt restructurings. The Company has recorded $1.3 million and $2.6 million in previous charge-offs on such loans at September 30, 2011 and December 31, 2010, respectively. The Company’s balance in the allowance for loan losses allocated to such troubled debt restructurings was $3.5 million and $3.3 million at September 30, 2011 and December 31, 2010, respectively.
Allowance for Loan Losses
The allowance for loan losses represents a reserve for inherent losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on non-accruing, past due and other loans that management believes might be potentially impaired or warrant additional attention. The Company segregates the loan portfolio by type of loan and utilizes this segregation in evaluating exposure to risks within the portfolio. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, the Company further segregates the loan portfolio by loan grades based on an assessment of risk for a particular loan or group of loans. Certain reviewed loans are assigned specific allowances when a review of relevant data determines that a general allocation is not sufficient. In establishing allowances, management considers historical loan loss experience but adjusts this data with a significant emphasis on data such as current loan quality trends, current economic conditions and other factors in the markets where the Company operates. Factors considered include, among others, current valuations of real estate in their markets, unemployment rates, the effect of weather conditions on agricultural related entities and other significant local economic events.
The Company has developed a methodology for determining the adequacy of the allowance for loan losses which is monitored by the Company’s Senior Credit Officer. Procedures provide for the assignment of a risk rating for every loan included in the total loan portfolio, with the exception of credit card receivables and overdraft protection loans which are treated as pools for risk rating purposes. The risk rating schedule provides nine ratings of which five ratings are classified as pass ratings and four ratings are classified as criticized ratings. Each risk rating is assigned a percentage factor to be applied to the loan balance to determine the adequate amount of reserve. Many of the larger loans require an annual review by an independent loan officer or an independent third party loan review firm. As a result of these loan reviews, certain loans may be assigned specific reserve allocations. Other loans that surface as problem loans may also be assigned specific reserves. Past due loans are assigned risk ratings based on the number of days past due. The calculation of the allowance for loan losses, including underlying data and assumptions, is reviewed regularly by the Company’s Chief Financial Officer and the Director of Internal Audit.
Loan losses are charged against the allowance when management believes the collection of a loan’s principal is unlikely. Subsequent recoveries are credited to the allowance. Consumer loans are charged-off in accordance with the Federal Financial Institutions Examination Council’s (“FFIEC”) Uniform Retail Credit Classification and Account Management Policy. Commercial loans are charged-off when they are deemed uncollectible, which usually involves a triggering event within the collection effort. If the loan is collateral dependent, the loss is more easily identified and is charged-off when it is identified, usually based upon receipt of an appraisal. However, when a loan has guarantor support, the Company may carry the estimated loss as a reserve against the loan while collection efforts with the guarantor are pursued. If, after collection efforts with the guarantor are complete, the deficiency is still considered uncollectible, the loss is charged-off and any further collections are treated as recoveries. In all situations, when a loan is downgraded to an Asset Quality Rating of 60 (Loss per the regulatory guidance), the uncollectible portion is charged-off.
Activity in the allowance for loan losses for the nine months ended September 30, 2011, for the year ended December 31, 2010 and for the nine months ended September 30, 2010 is as follows:
Balance, January 1
Provision for loan losses charged to expense
Loans charged off
Recoveries of loans previously charged off
Ending balance
During the nine months ended September 30, 2011, the year ended December 31, 2010, and the nine months ended September 30, 2010, the Company recorded provision for loan loss expense of $1.6 million, $1.7 million, and $1.0 million respectively, to account for losses where the initial estimate of cash flows was found to be excessive on loans acquired in FDIC-assisted transactions. These amounts are excluded from the rollforwards above and below but are reflected in the Company’s Consolidated Statements of Operations.
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The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2011 and the year ended December 31, 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
Balance, January 1, 2011
Balance, September 30, 2011
Period-end amount allocated to:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Balance, January 1, 2010
Balance, December 31, 2010
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NOTE 4 – ASSETS ACQUIRED IN FDIC-ASSISTED ACQUISITIONS
From October 2009 through July 2011, the Company participated in eight FDIC-assisted acquisitions whereby the Company purchased certain failed institutions out of the FDIC’s receivership. These institutions include:
Bank Acquired
Location:
Branches:
Date Acquired
American United Bank (“AUB”)
United Security Bank (“USB”)
Satilla Community Bank (“SCB”)
First Bank of Jacksonville (“FBJ”)
Tifton Banking Company (“TBC”)
Darby Bank & Trust (“DBT”)
High Trust Bank (“HTB”)
One Georgia Bank (“OGB”)
On July 15, 2011, the Bank purchased substantially all of the assets and assumed substantially all the liabilities of High Trust Bank (“HTB”) and One Georgia Bank (“OGB”) from the FDIC, as Receiver of HTB and OGB. HTB operated branches in Stockbridge and Leary, Georgia. OGB operated one branch in Midtown Atlanta, Georgia. The Company’s agreements with the FDIC included shared-loss agreements which affords the Bank significant protection from losses associated with loans and OREO. Under the terms of the shared-loss agreements, the FDIC will absorb 80% of all losses and share 80% of all loss recoveries. The shared-loss agreement applicable to single family residential mortgage loans provides for FDIC loss sharing and reimbursement by the Bank to the FDIC for ten years. The shared-loss agreement applicable to commercial loans and securities provides for FDIC loss sharing for five years and reimbursement by the Bank to the FDIC for eight years.
The estimated fair value of the assets acquired and the liabilities assumed are shown below:
Assets acquired:
Federal funds sold
Securities available for sale
Foreclosed property
Estimated FDIC indemnification asset
Assets acquired
Cash received (paid) to settle the acquisition
Fair value of assets acquired
Liabilities assumed:
Fair value of liabilities assumed
Net assets acquired / gain from acquisition
The Company’s bid to acquire the assets of HTB included a discount of approximately $33.5 million, and the Company received a $30.2 million cash payment from the FDIC to settle the acquisition. The Company’s bid to acquire the assets of OGB included a discount of approximately $22.5 million, and the Company paid the FDIC $5.7 million in cash to settle the acquisition.
The shared-loss agreements are subject to the servicing procedures as specified in the agreements with the FDIC. The expected reimbursements under the HTB and OGB loss-sharing agreements were recorded as an indemnification asset at their estimated fair values of $49.5 million and $45.5 million, respectively, on the acquisition date. Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded on either transaction.
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The HTB and OGB transactions resulted in before-tax gains of $18.9 million and $7.9 million, respectively, which are included in the Company’s September 30, 2011 Consolidated Statement of Operations. Due to the difference in tax bases of the assets acquired and liabilities assumed, the Bank recorded deferred tax liabilities with respect to HTB and OGB of $6.6 million and $2.8 million, respectively, resulting in after-tax gains of $12.3 million and $5.1 million, respectively.
The determination of the initial fair values of loans at the acquisition date and the initial fair values of the related FDIC indemnification assets involves a high degree of judgment and complexity. The carrying values of the acquired loans and the FDIC indemnification assets reflect management’s best estimate of the fair value of each of these assets as of the date of acquisition. However, the amount that the Company realizes on these assets could differ materially from the carrying values reflected in the financial statements included in this report, based upon the timing and amount of collections on the acquired loans in future periods. Because of the loss-sharing agreements with the FDIC on these assets, the Company does not expect to incur any significant losses. To the extent the actual values realized for the acquired loans are different from the estimates, the indemnification assets will generally be affected in an offsetting manner due to the loss-sharing support from the FDIC.
FASB ASC 310 – 30, Loans and Debt Securities Acquired with Deteriorated Credit Quality(“ASC 310”), applies to a loan with evidence of deterioration of credit quality since origination, acquired by completion of a transfer for which it is probable, at acquisition, that the investor will be unable to collect all contractually required payments receivable. ASC 310 prohibits carrying over or creating an allowance for loan losses upon initial recognition for loans which fall under the scope of this statement. At the acquisition dates, a majority of these loans were valued based on the liquidation value of the underlying collateral because the future cash flows are primarily based on the liquidation of underlying collateral. There was no allowance for credit losses established related to these ASC 310 loans at the acquisition dates, based on the provisions of this statement. Over the life of the acquired loans, the Company continues to estimate cash flows expected to be collected. If the expected cash flows expected to be collected increases, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life. If the expected cash flows expected to be collected decreases, the Company records a provision for loan loss in its consolidated statement of operations.
On the acquisition date, the preliminary estimates of the contractually required payments receivable for all ASC 310 loans acquired in the HTB acquisition totaled $136.9 million and the estimated fair values of the loans totaled $74.2 million, net of an accretable yield of $13.3 million, the difference between the value of the loans on the Company’s balance sheet and the cash flows they are expected to produce. On the acquisition date, the preliminary estimates of the contractually required payments receivable for all ASC 310 loans acquired in the OGB acquisition totaled $104.9 million and the estimated fair values of the loans totaled $49.9 million, net of an accretable yield of $9.3 million, the difference between the value of the loans on the Company’s balance sheet and the cash flows they are expected to produce. These amounts were determined based upon the estimated remaining life of the underlying loans, which includes the effects of estimated prepayments.
The estimated fair values of loans acquired in the HTB and OGB acquisitions are detailed below based on their initial estimate of credit quality (dollars in thousands):
High Trust Bank:
Commercial, industrial, agricultural
Construction & development
Consumer
One Georgia Bank:
The results of operations of HTB and OGB subsequent to the acquisition date are included in the Company’s consolidated statements of operations. The following unaudited pro forma information reflects the Company’s estimated consolidated results of operations as if the acquisitions had occurred on December 31, 2010 and 2009, unadjusted for potential cost savings (in thousands).
Net interest income and noninterest income
Net income (loss) available to common stockholders
Income (loss) per common share available to common stockholders – basic
Income (loss) per common share available to common stockholders – diluted
Average number of shares outstanding, basic
Average number of shares outstanding, diluted
In addition to the covered assets acquired in the most recent acquisitions, the Company has other investments in covered assets remaining from its previous FDIC-assisted acquisitions. The following table summarizes components of all covered assets at September 30, 2011 and December 31, 2010 and their origin:
Less adjustments related to credit risk
Less adjustments related to liquidity and yield
Total Covered Loans
OREO
Less fair value adjustments
Covered OREO
Total covered assets
FDIC loss-share receivable
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On the dates of acquisition, the Company estimated the future cash flows on each individual loan and made the necessary adjustments to reflect the asset at fair value. At each quarter end subsequent to the acquisition dates, the Company revises the estimates of future cash flows based on current information and makes the necessary adjustments to continue reflecting the assets at fair value. The adjustments to fair value are performed on a loan-by-loan basis and have resulted in the following:
Total Amounts
Adjustments needed where the Company’s initial estimate of cash flows were underestimated: (recorded with a reclassification from non-accretable difference to accretable yield)
Adjustments needed where the Company’s initial estimate of cash flows were overstated: (recorded through a provision for loan losses)
Amounts reflected in the Company’s Statement of Operations
A rollforward of acquired loans with deterioration of credit quality for the nine months ended September 30, 2011, the year ended December 31, 2010 and the nine months ended September 30, 2010 is shown below:
Change in estimate of cash flows, net of charge-offs or recoveries
Additions due to acquisitions
Other (loan payments, transfers, etc.)
A rollforward of acquired loans without deterioration of credit quality for the nine months ended September 30, 2011, the year ended December 31, 2010 and the nine months ended September 30, 2010 is shown below:
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The following is a summary of changes in the accretable yields of acquired loans during the nine months ended September 30, 2011, the year ended December 31, 2010 and the nine months ended September 30, 2010.
Accretion
Other activity, net
The shared-loss agreements are subject to the servicing procedures as specified in the agreement with the FDIC. The expected reimbursements under the shared-loss agreements were recorded as an indemnification asset at their estimated fair values of $95.0 million, $168.9 million and $45.8 million on the 2011, 2010 and 2009 acquisition dates, respectively. Changes in the FDIC shared-loss receivable for the nine months ended September 30, 2011, for the year ended December 31, 2010 and for the nine months ended September 30, 2010 are as follows:
Indemnification asset recorded in acquisitions
Payments received from FDIC
Effect of change in expected cash flows on covered assets
NOTE 5 – WEIGHTED AVERAGE SHARES OUTSTANDING
Due to the net loss reported for the quarter and nine-month periods ending September 30, 2010, the Company has excluded 23,439 and 28,924, respectively, of potential common shares as these would have been anti-dilutive. Earnings per share have been computed based on the following weighted average number of common shares outstanding:
Basic shares outstanding
Plus: Dilutive effect of ISOs
Plus: Dilutive effect of Restricted Grants
Diluted shares outstanding
NOTE 6 – OTHER BORROWINGS
The Company has, from time to time, utilized certain borrowing arrangements with various financial institutions to fund growth in earning assets or provide additional liquidity when appropriate spreads can be realized. At September 30, 2011 and December 31, 2010, there were $21.0 million and $43.5 million, respectively, outstanding borrowings with the Company’s correspondent banks. There were no outstanding borrowings with the Company’s correspondent banks at September 30, 2010. The Company’s success with attracting and retaining retail deposits has allowed for very low dependence on more volatile non-deposit funding.
NOTE 7 – COMMITMENTS
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 varying terms. 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.
The Company’s commitments to extend credit and standby letters of credit are presented in the following table:
Commitments to extend credit
Standby letters of credit
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 (the “Securities Act”), 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 SEC 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 table sets forth unaudited selected financial data for the previous five quarters. This data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in this Item 2.
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Results of Operations:
Net interest income (tax equivalent)
Non-interest income
Non-interest expense
Selected Average Balances:
Loans, net of unearned income
Investment securities
Earning assets
Common shareholders’ equity
Period-End Balances:
Per Common Share Data:
Earnings per share - Basic
Earnings per share - Diluted
Common book value per share
End of period shares outstanding
Weighted average shares outstanding
Market Price:
High closing price
Low closing price
Closing price for quarter
Average daily trading volume
Cash dividends per share
Stock dividend
Closing price to book value
Performance Ratios:
Return on average assets
Return on average common equity
Average loans to average deposits
Average equity to average assets
Net interest margin (tax equivalent)
Efficiency ratio (tax equivalent)
Overview
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 balance sheet as of September 30, 2011 as compared to December 31, 2010 and operating results for the three-and nine-month periods ended September 30, 2011 and 2010. These comments should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.
Results of Operations for the Three Months Ended September 30, 2011
Consolidated Earnings and Profitability
Ameris reported net income available to common shareholders of $15.6 million, or $0.66 per diluted share, for the quarter ended September 30, 2011, compared to a net loss for the same quarter in 2010 of $1.7 million, or $0.07 per diluted share. The Company’s return on average assets and average shareholders’ equity increased in the third quarter of 2011 to 2.04% and 27.13%, respectively, compared to (0.28%) and (2.46%) in the third quarter of 2010. The Company’s results for the third quarter of 2011 include several amounts that are considered non-recurring. Gains on the FDIC-assisted acquisitions of OGB and HTB totaled approximately $26.9 million. Partially offsetting this amount was non-recurring acquisition expenses that are not included in the bargain purchase calculation but relate to these acquisitions. Severance expenses, conversion expenses and other miscellaneous expenses associated with these two banks totaled $1.4 million in the third quarter of 2011. Additionally, the Company accelerated efforts to move problem assets through retail channels during the third quarter of 2011 with sales of approximately $25.3 million of non-performing or classified assets. This “bulk-sale” type activity generated losses or related expenses totaling $5.8 million for the third quarter of 2011. Excluding these non-recurring income and expense amounts, the Company would have reported net income of $2.4 million, or $0.09 per diluted share, for the third quarter of 2011.
Net Interest Income and Margins
On a tax equivalent basis, net interest income for the third quarter of 2011 was $28.0 million, an increase of $5.8 million compared to $22.2 reported in the same quarter in 2010. The Company’s net interest margin has been positively affected by improvements in the expected cash flows from recent FDIC acquisitions and by steady decreases in the Company’s cost of funds. The Company’s net interest margin was 4.44% for the third quarter of 2011, compared to 4.04% in the third quarter of 2010. Increases in earning assets over the past year have been in covered loans with favorable yields compared to the Company’s low cost of funds.
During the third quarter of 2011, interest income, on a tax equivalent basis, totaled $35.0 million, compared to $29.4 million in the same quarter of 2010. Yields on earning assets increased to 5.55% in the third quarter of 2011 compared to 5.34% reported in the third quarter of 2010. During the third quarter of 2011, short-term assets averaged 7.4% of total earning assets, compared to 11.5% in the same quarter in 2010, as the Company replaced short-term assets with loans backed by shared-loss agreements with the FDIC. Current opportunities to invest a portion of the short-term assets in the bond market have been limited by the Company’s inability to maintain certain portfolio characteristics with current yields and structures being offered. Efforts to increase lending activities have been slow to generate increases in outstanding loans due to the current economic conditions in the Company’s markets.
Total funding costs declined to 1.02% in the third quarter of 2011 compared to 1.33% during the third quarter of 2010. Deposit costs decreased from 1.31% in the third quarter of 2010 and 1.08% in the second quarter of 2011 to 0.97% in the third quarter of 2011. Ongoing efforts to maintain the percentage of funding from transaction deposits have succeeded such that non-CD deposits averaged 60.5% of total deposits in the third quarter of 2011, compared to 58.3% during the third quarter of 2010. Lower costs on deposits were due mostly to the lower rate environment and the Company’s ability to offer lower priced CDs due to its larger than normal position in short-term assets. Further opportunity to realize savings on deposits exists but may be limited due to current costs. Average balances of interest bearing deposits and their respective costs for the third quarter of 2011 and 2010 are shown below:
NOW
MMDA
Savings
Retail CDs < $100,000
Retail CDs > $100,000
Brokered CDs
Interest bearing deposits
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Provision for Loan Losses and Credit Quality
The Company’s provision for loan losses during the third quarter of 2011 amounted to $7.6 million, compared to $9.1 million in the second quarter of 2011 and $9.7 million in the third quarter of 2010. Although the Company has experienced improving trends in criticized and classified assets for several quarters, higher levels of provision for loan losses have been required to account for continued devaluation of real estate collateral. At September 30, 2011, classified loans still accruing totaled $33.3 million, compared to $30.7 million at September 30, 2010. Non-accrual loans at September 30, 2011 totaled $59.0 million, a 2.4% decrease from the $60.5 million reported at June 30, 2011 and a 34.3% decrease from the $89.9 million reported at September 30, 2010.
At September 30, 2011, other real estate owned (excluding covered OREO) totaled $54.5 million, compared to $61.5 million at June 30, 2011 and $50.9 million at September 30, 2010. Management regularly assesses the valuation of OREO through periodic reappraisal and through inquiries received in the marketing process. The Company has found that with a marketing window of 3-6 months, the liquidation of properties varies from 85% to 100% of current book value. Certain properties, mostly raw land and subdivision lots, have extended marketing periods because of excessive inventory and record low home building activity. At the end of the third quarter of 2011, total non-performing assets decreased to 3.77% of total assets compared to 4.27% at June 30, 2011 and 5.78% at September 30, 2010. Management continues to aggressively identify and resolve problem assets while seeking quality credits to grow the loan portfolio.
Net charge-offs on loans during the third quarter of 2011 were $6.8 million, or 1.98% of loans on an annualized basis, compared to $9.1 million, or 2.14% of loans, in the third quarter of 2010. The Company’s allowance for loan losses at September 30, 2011 was $35.2 million, or 2.57% of total loans, compared to $34.1 million, or 2.34% of total loans, at September 30, 2010.
Non-interest Income
Total non-interest income for the third quarter of 2011 was $33.7 million, compared to $5.0 million in the third quarter of 2010. During the third quarter of 2011, the Company reported a gain of $26.9 million on FDIC-assisted transactions. Excluding this gain, total non-interest income increased by $1.8 million, or 36.8%, in the third quarter of 2011, when compared to the same period in 2010. Service charges on deposit accounts in the third quarter of 2011 were $4.7 million, compared to $3.8 million in the third quarter of 2010. Increases in service charges related to the acquired deposits in FDIC-assisted transactions, along with increased retention of fees related to insufficient funds, were the primary reasons for the increase over prior period levels.
Non-interest Expense
Total non-interest expenses for the third quarter of 2011 increased to $29.3 million compared to $18.9 million in the same quarter in 2010. Credit related expenses, including problem loan and OREO expense and OREO write-downs and losses, increased to $9.0 million in the third quarter of 2011 compared to $3.2 million in the third quarter of 2010. During the third quarter of 2011, the Company increased sales activity in retail channels to move problem assets (non-performing assets and classified assets). The additional effort in the third quarter of 2011 was driven by lower sales prices, causing the Company to realize losses on the sale of OREO of $5.9 million, compared to OREO losses of $1.3 million in the third quarter of 2010. Salaries and benefits increased $2.5 million when compared to the third quarter of 2010; however, this increase is in proportion to the Company’s asset growth. Occupancy and equipment expenses for the third quarter of 2011 amounted to $3.2 million, representing an increase of $1.0 million from the same quarter in 2010. Data processing and telecommunications expenses increased $1.1 million to $2.8 million for the third quarter of 2011 from $1.7 million for the same period in 2010. Both of these increases are directly correlated to the increase in the number of branch locations from the third quarter of 2010 to the third quarter of 2011.
Income Taxes
Income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income and the amount of non-deductible expenses. For the third quarter of 2011, the Company reported an income tax expense of $8.2 million. This compares to an income tax benefit of $760,000 in the same period of 2010. The Company’s effective tax rate for the three months ending September 30, 2011 and 2010 was 33.4% and 45.9%, respectively.
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Results of Operations for the Nine Months Ended September 30, 2011
Interest Income
Interest income for the nine months ended September 30, 2011 was $103.5 million on a tax equivalent basis, an increase of $14.1 million when compared to $89.4 million for the same period in 2010. Average earning assets for the nine-month period increased $293.9 million to $2.47 billion as of September 30, 2011 compared to $2.18 billion as of September 30, 2010. Yield on average earning assets improved slightly to 5.59% in the first nine months of 2011 compared to 5.48% in the first nine months of 2010. Earning assets acquired in connection with the Company’s FDIC-assisted acquisitions have generally allowed the Company to maintain level amounts of earning assets while interest rate floors on individual customer loans have allowed the Company to keep the yield on loans from falling precipitously in the current rate environment. Additionally, yields on the acquired assets have been much stronger than the Company’s other earning assets, helping boost the Company’s overall yield on earning assets.
Interest Expense
Total interest expense for the nine months ended September 30, 2011 amounted to $22.1 million, reflecting a slight increase of $103,000 from the same period of 2010. During the nine-month period ended September 30, 2011, the Company’s funding costs declined to 1.10% from 1.36% reported in the previous year. The majority of the decline in interest expense and costs relates to improvements in the cost of the Company’s retail time deposits which fell to 1.51% in the nine-month period ending September 30, 2011 compared to 1.83% in the same period in 2010. In addition to lower costs on deposits, the Company’s mix of deposits has improved over the past year. At the end of the third quarter of 2011, the Company had $1.64 billion in non-CD deposits compared to $1.25 billion at the same time in 2010. Non-interest bearing deposits increased 50.4% from $235.6 million and 11.2% of total deposits at September 30, 2010 to $354.4 million and 13.5% of total deposits at September 30, 2011.
Net Interest Income
Higher levels of earning assets with generally level yields have combined with reduced funding costs to result in material improvements in net interest income. For the year-to-date period ending September 30, 2011, the Company reported $81.44 million of net interest income on a tax equivalent basis, compared to $67.5 million of net interest income for the same period in 2010. The Company’s net interest margin increased to 4.40% in the nine month period ending September 30, 2011 compared to 4.14% in the same period in 2010.
Provision for Loan Losses
The provision for loan losses decreased to $23.7 million for the nine months ended September 30, 2011 compared to $39.1 million in the same period in 2010. Non-performing assets totaled $113.6 million at September 30, 2011, compared to $140.8 million at September 30, 2010. For the nine-month period ended September 30, 2011, Ameris had net charge-offs totaling $21.4 million, compared to $39.8 million for the same period in 2010. Annualized net charge-offs as a percentage of loans improved from 3.65% during the first nine month of 2010 to 2.09% during the first nine months of 2011.
Non-interest income for the first nine months of 2011 was $45.9 million, compared to $23.0 million in the same period in 2010. Excluding non-recurring gains on investment securities and FDIC-assisted acquisitions, the Company’s non-interest income totaled $18.8 million, an increase of 29.0% compared to the same period in 2010. Service charges on deposit accounts increased approximately $2.8 million to $13.6 million in the first nine months of 2011 compared to the same period in 2010. The increases in service charges are related to higher numbers of deposit accounts subject to fees and charges as well as incremental revenue from the deposit accounts acquired in the Company’s FDIC-assisted acquisitions. Income from mortgage banking activity declined from $1.9 million in the first nine months of 2010 to $1.5 million in the first nine months of 2011 due to the reduction in re-finance activity. The accretion of the discount of the FDIC indemnification asset also attributed to the increase of non-interest income during the first nine months of 2011 compared to the same period in 2010.
Total operating expenses for the first nine months of 2011 increased to $73.0 million compared to $59.3 million in the same period in 2010. Salaries and benefits increased $5.9 million when compared to the first nine months of 2010; however, this increase is in proportion to the Company’s asset growth. Occupancy and equipment expenses for the first nine months of 2011 amounted to $8.7 million, representing an increase of $2.4 million from the same period in 2010. Data processing and telecommunications expenses increased $2.1 million to $7.7 million for the first nine months of 2011 from $5.6 million for the same period in 2010. Both of these increases are directly correlated to the increase in the number of branch locations from September 30, 2010 to September 30, 2011. Credit related expenses, including problem loan and OREO expense and OREO write-downs and losses, increased to $14.7 million in the first nine months of 2011 compared to $11.5 million in the first nine months of 2010 for the same reasons as discussed in the quarter to date results above.
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In the first nine months of 2011, the Company recorded an income tax expense totaling approximately $10.0 million, representing an effective tax rate of 33.3%. This compares to a benefit of $3.3 million in the first nine months of 2010 representing an effective rate of 36.0%.
Financial Condition as of September 30, 2011
Securities
Debt securities with readily determinable fair values are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income, net of the related deferred tax effect. Equity securities, including restricted equity securities, are classified as other investments and are recorded at cost.
The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the settlement date. Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses.
In determining whether other-than-temporary impairment losses exist, management considers: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Substantially all of the unrealized losses on debt securities are related to changes in interest rates and do not affect the expected cash flows of the issuer or underlying collateral. All unrealized losses are considered temporary because each security carries an acceptable investment grade and the Company does not intend to sell these investment securities at an unrealized loss position at September 30, 2011, and it is more likely than not that the Company will not be required to sell these securities prior to recovery or maturity. Therefore, at September 30, 2011, these investments are not considered impaired on an other-than temporary basis.
The following table illustrates certain information regarding the Company’s investment portfolio with respect to yields, sensitivities and expected cash flows over the next twelve months assuming constant prepayments and maturities:
State and municipal securities
Total debt securities
Loans and Allowance for Loan Losses
At September 30, 2011, gross loans outstanding (including covered loans) were $1.96 billion, an increase from $1.65 billion reported at September 30, 2010. When compared to December 31, 2010, gross loans increased approximately $34.6 million, or 1.8%. The Company’s participation in FDIC-assisted acquisitions was integral to being able to maintain a certain level of loans because management does not believe that enough loan opportunities with acceptable quality and profitability existed in our current market areas to cause loan footings to stabilize and increase. Decreases in legacy loans over the past year reflect this trend, with legacy loans declining 6.0% from $1.46 billion at September 30, 2010 to $1.37 billion at September 30, 2011.
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The decline in loans also reflects management’s focus on reducing higher risk loans within the Bank’s loan portfolio, as well as the slower economic environment that persisted throughout 2009 and 2010. The Company regularly monitors the composition of the loan portfolio to evaluate the adequacy of the allowance for loan losses in light of the impact that changes in the economic environment may have on the loan portfolio.
The Company focuses on the following loan categories: (1) commercial, financial and agricultural; (2) residential real estate; (3) commercial and farmland real estate; (4) construction and development related real estate; and (5) consumer. The Company’s management has strategically located its branches in select markets in south and southeast Georgia, north Florida, southeast Alabama and throughout South Carolina to take advantage of the growth in these areas.
The Company’s risk management processes include a loan review program designed to evaluate the credit risk in the loan portfolio and ensure credit grade accuracy. Through the loan review process, the Company conducts: (1) a loan portfolio summary analysis; (2) charge-off and recovery analysis; (3) trends in accruing problem loan analysis; and (4) problem and past due loan analysis. This analysis process serves as a tool to assist management in assessing the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as “substandard” are loans which are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. These assets exhibit a well-defined weakness or are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These weaknesses may be characterized by past due performance, operating losses and/or questionable collateral values. Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans but have an increased risk of loss. Loans classified as “loss” are those loans which are considered uncollectible and are in the process of being charged-off.
The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The provision for loan losses is based on management’s evaluation of the size and composition of the loan portfolio, the level of non-performing and past due loans, historical trends of charged-off loans and recoveries, prevailing economic conditions and other factors management deems appropriate. The Company’s management has established an allowance for loan losses which it believes is adequate for the risk of loss inherent in the loan portfolio. Based on a credit evaluation of the loan portfolio, management presents a monthly review of the allowance for loan losses to the Company’s Board of Directors. The review that management has developed primarily focuses on risk by evaluating individual loans in certain risk categories. These categories have also been established by management and take the form of loan grades. By grading the loan portfolio in this manner the Company’s management is able to effectively evaluate the portfolio by risk, which management believes is the most effective way to analyze the loan portfolio and thus analyze the adequacy of the allowance for loan losses.
The allowance for loan losses is established by examining: (1) the large classified loans, nonaccrual loans and loans considered impaired and evaluating them individually to determine the specific reserve allocation; and (2) the remainder of the loan portfolio to allocate a portion of the allowance based on past loss experience and the economic conditions for the particular loan category. The Company also considers other factors such as changes in lending policies and procedures; changes in national, regional, and/or local economic and business conditions; changes in the nature and volume of the loan portfolio; changes in the experience, ability and depth of either the bank president or lending staff; changes in the volume and severity of past due and classified loans; changes in the quality of the Company’s corporate loan review system; and other factors management deems appropriate.
For the nine month period ended September 30, 2011, the Company recorded net charge-offs totaling $21.4 million, compared to $39.8 million for the period ended September 30, 2010. The provision for loan losses for the nine months ended September 30, 2011 decreased to $23.7 million compared to $39.1 million during the nine-month period ended September 30, 2010. At the end of the third quarter of 2011, the allowance for loan losses totaled $35.2 million, or 2.57% of total legacy loans, compared to $34.6 million, or 2.52% of total legacy loans, at December 31, 2010 and $34.1 million, or 2.34% of total legacy loans, at September 30, 2010.
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The following table presents an analysis of the allowance for loan losses for the nine months ended September 30, 2011 and 2010:
Balance of allowance for loan losses at beginning of period
Provision charged to operating expense
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net charge-offs
Balance of allowance for loan losses at end of period
Net annualized charge-offs as a percentage of average loans
Allowance for loan losses as a percentage of loans at end of period
Assets Covered by Loss-Sharing Agreements with the FDIC
Loans that were acquired in FDIC-assisted transactions that are covered by the loss-sharing agreements with the FDIC (“covered loans”) totaled $595.4 million, $555.0 million and $185.3 million at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. OREO that is covered by the loss-sharing agreements with the FDIC totaled $81.9 million, $54.9 million and $28.4 million at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. The loss-sharing agreements are subject to the servicing procedures as specified in the agreements with the FDIC. The expected reimbursements under the loss-sharing agreements were recorded as an indemnification asset at their estimated fair value of $95.0 million, $168.9 million and $45.8 million on the 2011, 2010 and 2009 acquisition dates, respectively. The FDIC loss-share receivable reported at September 30, 2011, December 31, 2010 and September 30, 2010 was $239.7 million, $177.2 million and $42.5 million, respectively.
The Company recorded the loans at their fair values, taking into consideration certain credit quality, risk and liquidity marks. The Company is confident in its estimation of credit risk and its adjustments to the carrying balances of the acquired loans. If the Company determines that a loan or group of loans has deteriorated from its initial assessment of fair value, a reserve for loan losses will be established to account for that difference. During the nine months ended September 30, 2011 and the year ended December 31, 2010, the Company recorded provision for loan loss expense of $1.6 million and $1.7 million, respectively, to account for losses where the initial estimate of cash flows was found to be excessive on loans acquired in FDIC-assisted transactions. If the Company determines that a loan or group of loans has improved from its initial assessment of fair value, the increase in cash flows over those expected at the acquisition date is recognized as interest income prospectively.
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Non-Performing Assets
Non-performing assets include nonaccrual loans, accruing loans contractually past due 90 days or more, repossessed personal property and other real estate owned. Loans are placed on nonaccrual status when management has concerns relating to the ability to collect the principal and interest and generally when such loans are 90 days or more past due. Management performs a detailed review and valuation assessment of impaired loans on a quarterly basis and recognizes losses when impairment is identified. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is reversed against current income.
As of September 30, 2011, nonaccrual or impaired loans totaled $59.1 million, a decrease of approximately $20.2 million since December 31, 2010. The decrease in nonaccrual loans is due to success in the foreclosure and resolution process as well as a significant slowdown in the formation of new problem credits. Non-performing assets as a percentage of total assets were 3.77%, 4.62% and 5.78% at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.
Non-performing assets at September 30, 2011, December 31, 2010 and September 30, 2010 were as follows:
Total nonaccrual loans
Other real estate owned and repossessed collateral
Accruing loans delinquent 90 days or more
Total non-performing assets
Commercial Lending Practices
On December 12, 2006, the Federal Bank Regulatory Agencies released guidance on Concentration in Commercial Real Estate Lending. This guidance defines commercial real estate (“CRE”) loans as loans secured by raw land, land development and construction (including 1-4 family residential construction), multi-family property and non-farm nonresidential property where the primary or a significant source of repayment is derived from rental income associated with the property, excluding owner occupied properties (loans for which 50% or more of the source of repayment is derived from the ongoing operations and activities conducted by the party, or affiliate of the party, who owns the property) or the proceeds of the sale, refinancing or permanent financing of the property. Loans for owner occupied CRE are generally excluded from the CRE guidance.
The CRE guidance is applicable when either:
Banks that are subject to the CRE guidance’s criteria are required to implement enhanced strategic planning, CRE underwriting policies, risk management and internal controls, portfolio stress testing, risk exposure limits, and other policies, including management compensation and incentives, to address the CRE risks. Higher allowances for loan losses and capital levels may also be appropriate.
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As of September 30, 2011, the Company exhibited a concentration in CRE loan category based on Federal Reserve Call codes. The primary risks of CRE lending are:
The following table outlines CRE loan categories and CRE loans as a percentage of total loans as of September 30, 2011 and December 31, 2010. The loan categories and concentrations below are based on Federal Reserve Call codes and include covered loans.
Construction and development loans
Multi-family loans
Nonfarm non-residential loans
Total CRE Loans
All other loan types
Total Loans
The following table outlines the percent of total CRE loans, net owner occupied loans to total risk-based capital, and the Company’s internal concentration limits as of September 30, 2011 and December 31, 2010:
Construction and development, including covered loans
Commercial real estate, including covered loans
Construction and development, excluding covered loans
Commercial real estate, excluding covered loans
Short-Term Investments
The Company’s short-term investments are comprised of federal funds sold and interest bearing balances. At September 30, 2011, the Company’s short-term investments were $170.3 million, compared to $261.3 million and $306.9 million at December 31, 2010 and September 30, 2010, respectively. The recent FDIC-assisted acquisitions allowed the Company to replace short term assets with loans backed by shared-loss agreements with the FDIC.
Derivative Instruments and Hedging Activities
The Company had cash flow hedges with notional amounts totaling $35.0 million at December 31, 2010 and September 30, 2010, for the purpose of converting floating rate loans to fixed rate. The Company had a cash flow hedge with notional amount of $37.1 million at September 30, 2011 and December 31, 2010 for the purpose of converting the variable rate on the junior subordinated debentures to fixed rate. The fair value of these instruments amounted to approximately ($31,000), $3.0 million and $1.3 million as of September 30, 2011, December 31, 2010 and September 30, 2010, respectively, and was recorded as an asset. No hedge ineffectiveness from cash flow hedges was recognized in the statement of operations. All components of each derivative’s gain or loss are included in the assessment of hedge effectiveness.
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Capital
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 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 regulatory capital standards are defined by the following three key measurements:
As of September 30, 2011, under the regulatory capital standards, the Bank was considered “well capitalized” under all capital measurements. The following table sets forth the regulatory capital ratios of Ameris at September 30, 2011, December 31, 2010 and September 30, 2010.
Leverage Ratio (tier 1 capital to average assets)
Consolidated
Ameris Bank
Core Capital Ratio (tier 1 capital to risk weighted assets)
Total Capital Ratio (total capital to risk weighted assets)
Capital Purchase Program
On November 21, 2008, the Company, elected to participate in the Capital Purchase Program (“CPP”) established under the Emergency Economic Stabilization Act of 2008 (“EESA”). Accordingly, on such date, the Company issued and sold to the United States Treasury (“Treasury”), for an aggregate cash purchase price of $52 million, (i) 52,000 shares (the “Preferred Shares”) of the Company’s fixed rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, and (ii) a ten-year warrant (the “Warrant”) to purchase up to 679,443 shares of the Common Stock at an exercise price of $11.48 per share. The issuance and sale of these securities was a private placement exempt from registration pursuant to Section 4(2) of the Securities Act.
Cumulative dividends on the Preferred Shares will accrue on the liquidation preference at a rate of 5% per annum for the first five years and at a rate of 9% per annum thereafter, but such dividends will be paid only if, as and when declared by the Company’s Board of Directors. The Preferred Shares have no maturity date and rank senior to the Common Stock (and pari passu with the Company’s other authorized preferred stock, of which no shares are currently designated or outstanding) with respect to the payment of dividends and distributions and amounts payable upon liquidation, dissolution and winding up of the Company. Subject to the approval of the Board of Governors of the Federal Reserve System, the Preferred Shares are redeemable at the option of the Company at 100% of their liquidation preference.
The Purchase Agreement pursuant to which the Preferred Shares and the Warrant were sold contains limitations on the payment of dividends on the Common Stock (including with respect to the payment of cash dividends in excess of $0.05 per share, which was the amount of the last regular dividend declared by the Company prior to October 14, 2008) and on the Company’s ability to repurchase its Common Stock, and subjects the Company to certain of the executive compensation limitations included in the EESA.
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Interest Rate Sensitivity and Liquidity
The Company’s primary market risk exposures are credit risk, interest rate risk, and to a lesser degree, liquidity risk. The Bank operates under an Asset Liability Management Policy approved by the Company’s Board of Directors and the ALCO Committee. The policy outlines limits on interest rate risk in terms of changes in net interest income and changes in the net market values of assets and liabilities over certain changes in interest rate environments. These measurements are made through a simulation model which projects the impact of changes in interest rates on the Bank’s assets and liabilities. The policy also outlines responsibility for monitoring interest rate risk, and the process for the approval, implementation and monitoring of interest rate risk strategies to achieve the Bank’s interest rate risk objectives.
The ALCO Committee is comprised of senior officers of Ameris and two outside members of the Company’s Board of Directors. The ALCO Committee makes all strategic decisions with respect to the sources and uses of funds that may affect net interest income, including net interest spread and net interest margin. The objective of the ALCO Committee is to identify the interest rate, liquidity and market value risks of the Company’s balance sheet and use reasonable methods approved by the Company’s Board of Directors and executive management to minimize those identified risks.
The normal course of business activity exposes the Company to interest rate risk. Interest rate risk is managed within an overall asset and liability framework for the Company. The principal objectives of asset and liability management are to predict the sensitivity of net interest spreads to potential changes in interest rates, control risk and enhance profitability. Funding positions are kept within predetermined limits designed to properly manage risk and liquidity. The Company employs sensitivity analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates. In addition, fluctuations in interest rates usually result in changes in the fair market value of the Company’s financial instruments, cash flows and net interest income. The Company’s interest rate risk position is managed by the ALCO Committee.
The Company uses a simulation modeling process to measure interest rate risk and evaluate potential strategies. Interest rate scenario models are prepared using software created and licensed from an outside vendor. The Company’s simulation includes all financial assets and liabilities. Simulation results quantify interest rate risk under various interest rate scenarios. Management then develops and implements appropriate strategies. The ALCO Committee has determined that an acceptable level of interest rate risk would be for net interest income to decrease no more than 5.00% given a change in selected interest rates of 200 basis points over any 24-month period.
Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of Ameris to manage those requirements. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance it has in short-term investments at any given time will adequately cover any reasonably anticipated immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks, which could provide funds on short notice, if needed. The Company has invested in FHLB stock for the purpose of establishing credit lines with the FHLB. The credit availability to the Bank is equal to 20% of the Bank’s total assets as reported on the most recent quarterly financial information submitted to the regulators subject to the pledging of sufficient collateral. At September 30, 2011, there were $21.0 million of advances outstanding on the Company’s lines of credit with the FHLB.
The following liquidity ratios compare certain assets and liabilities to total deposits or total assets:
Investment securities available for sale to total deposits
Loans (net of unearned income) to total deposits (1)
Interest-earning assets to total assets
Interest-bearing deposits to total deposits
The liquidity resources of the Company are monitored continuously by the ALCO Committee and on a periodic basis by state and federal regulatory authorities. As determined under guidelines established by these regulatory authorities, the Company’s and the Bank’s liquidity ratios at September 30, 2011 were considered satisfactory. The Company is aware of no events or trends likely to result in a material change in liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed only to U.S. dollar interest rate changes, and, accordingly, the Company manages exposure by considering the possible changes in the net interest margin. The Company does not have any trading instruments nor does it classify any portion of the investment portfolio as held for trading. The Company’s hedging activities are limited to cash flow hedges and are part of the Company’s program to manage interest rate sensitivity. At September 30, 2011, the Company had one effective LIBOR rate swap with a notional amount of $37.1 million. The LIBOR rate swap exchanges fixed rate payments of 4.15% for floating rate payments based on the three month LIBOR and matures December 2018. Finally, the Company has no exposure to foreign currency exchange rate risk, commodity price risk and other market risks.
Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as “interest rate risk”. The repricing of interest-earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of the Company’s asset/liability management program, the timing of repriced assets and liabilities is referred to as “Gap management”.
The Company uses simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allows management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve-month period is subjected to a gradual 200 basis point increase or decrease in market rates on net interest income and is monitored on a quarterly basis.
Additional information required by Item 305 of Regulation S-K is set forth under Part I, Item 2 of this report.
Item 4. Controls and Procedures.
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act), as of the end of the period covered by this report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective.
During the quarter ended September 30, 2011, there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Nothing to report with respect to the period covered by this report.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in Item 1A. of Part 1 in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Item 4. (Removed and Reserved).
Item 5. Other Information.
Item 6. Exhibits.
The exhibits required to be furnished with this report are listed on the exhibit index attached hereto.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Dennis J. Zember Jr.
Dennis J. Zember Jr., Executive Vice President and
Chief Financial Officer (duly authorized signatory
and principal accounting and financial officer)
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EXHIBIT INDEX
Exhibit
No.
Description
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