Rising Star Buy: Ameris Bancorp

I've been a believer for a while now that there's value in banks. The hardest part is sifting through all of the wreckage. But if you know what you are looking for, then chances are you may just be able to find it. Such is the case for me this month as I'm buying Ameris Bancorp (Nasdaq: ABCB  ) for my Rising Stars portfolio.

You're doing what?!
Yes, I know. It's a small bank based out of Georgia. And in case you missed it, Georgia has been ground zero for banks throughout the financial crisis. But there are still good banks in the state -- and Ameris Bancorp is one of them.

The business
Founded in 1971 as American Banking Company, today's Ameris Bancorp operates 50 branches throughout Georgia, Florida, Alabama, and South Carolina. As a small, community-based bank, Ameris focuses on personalized service and building strong, long-lasting customer relationships. This, in turn, provides the bank with a substantial and reliable low-cost deposit base, and it seems to be working. Today, the bank manages 150,000 core customer accounts with $2.1 billion in deposits and $2.4 billion in assets. And thanks to the financial crisis, they are getting a little bigger.

Trouble meets opportunity
Housing is still a mess, and unemployment is as stubborn as my dog when I take her to the vet. Consequently, a lot of banks have gone belly up. But Ameris has fared better than most, and the bank's capital ratios indicate that it's well capitalized:

Ratio

Ameris Bancorp

Minimum to be "well capitalized"

Leverage Ratio 12.01% Greater than or equal to 5%
Core Capital Ratio 17.75% Greater than or equal to 6%
Total Capital Ratio 19.01% Greater than or equal to 10%

Source: Ameris Bancorp's most recent 10Q.

And it isn't like this just happened either. Looking back to the same period last year, their ratios were respectively 8.69%; 11.28%; and 12.51%.

The Federal Deposit and Insurance Corporation has been working with Ameris to take over some of the smaller failed institutions in Georgia like Darby Bank & Trust and Tifton Banking Company. These acquisitions add almost $730 million in additional deposits for Ameris. And the agreement with the FDIC ensures that Ameris is extremely limited in its exposure to any potential losses. What this means ultimately is that the FDIC sees Ameris as part of the solution. The market, on the other hand, is pricing the stock like any other nebulous small banking operation.

Ameris also maintains a well-diversified book of loans without holding any tremendous exposure to one particular line. Here's the breakdown on types of loans and percentages:

Loan type

Percentage of portfolio

Consumer installment and residential 24%
Covered 11%
Owner occupied commercial real estate 17%
Non-owner occupied commercial real estate 19%
Construction 11%
Commercial and industrial 7%
Agriculture 11%

Source: Ameris Bancorp presentation.

This has got to be risky
There's no telling how far along we really are in working through this whole credit mess. And with Georgia's unemployment rate still higher than the national average, consumers are having a heck of a time paying the bills. Ameris will need to avoid taking on more than it can handle.

Smaller banks are also recovering from the financial crisis at a slower pace than banks like US Bancorp (NYSE: USB  ) and Wells Fargo (NYSE: WFC  ) . Insiders own 3.5% of the shares outstanding, which gives me a little peace of mind, and I see it as a positive that the bank recently suspended their dividend in order to focus on keeping healthy. Note that Ameris' loan loss reserves are down from a year ago -- this is definitely something to keep an eye on.

Is it worth it?
Looking at return on assets is one way to value bank stocks, and in normal times Ameris can generate around a 1% return. With $2.5 billion in assets today, this translates into a little more than a dollar per share in earnings. Tack that on to a 10-year average P/E of 14 and the stock could be worth between $14 and $15. Alas, returns have not been so kind to banks over the past few years. In order to get this ratio back up to snuff, Ameris needs to focus on net interest margin, charge off ratio, and fee income from banking and lending services. If they can do this and successfully integrate their acquisitions, I see the stock being worth substantially more in a healthier economy.

Southern comfort
I'm going to fill my motley portfolio with several small caps along the way; Ameris Bancorp is the first and I'm giving it a 3% position in the context of a well-constructed basket. Here, we have a tiny bank in a brutal environment. But I do believe it's doing the right things to work through it. Agree? Don't agree? Swing on by my discussion board and let's talk. You can also follow me on Twitter. Here's to the future!

Stock Advisor analyst Jason Moser owns shares of Wells Fargo and Ameris Bancorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (17)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2010, at 6:46 PM, nonzerosum wrote:

    It has a D rating by Weiss:

    http://i.thestreet.com/files/tsc/v2008/photos/charts/1124_ge...

    It says 8% non performing loans. That doesn't sound good. What are your thoughts about this article:

    http://www.thestreet.com/story/10932107/2/georgias-strongest...

    Thanks,

    tj

  • Report this Comment On November 30, 2010, at 8:31 PM, TMFJMo wrote:

    I did see that. A couple of points though: The Weiss rating is based on numbers from the June 30, 2010 financials. Nonperforming loans as of the most recent (read: 3rd) quarter actually comes in at 5.4% and non-performing assets as a % of total assets comes in at 5.67%. So it does look like there is some improvement.

    Another thing that continues to drag on the financials is OREO (other real estate owned) which is essentially foreclosures. According to the most recent release they continue to focus on unloading OREO and are seeing incremental improvement.

    So is it a perfect situation? Nope. It's a small bank in Georgia....very tough environment. But I see Ameris as focusing on the right things to keep things going. Hopefully the environment will continue to improve over time. If it does I think Ameris will do well.

    The article also doesn't refer to Ameris in the pejorative at all. It only states what I also stated in my article, that they acquired two failed institutions.

    No doubt this is a riskier play, but the Weiss ratings are just that, their ratings. They list the 10 largest GA banks there and 6 of them are D+ or worse and the best grade is one B-, so while I did see it, ultimately I am not letting that list make my decisions.

    Now if was on that first list with the GA banks with the weakest asset quality...well that would be a different story :)

    Hope this helps...thanks for posting!

    JMo

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