This Bank Structured a Creative Deal to Work Around Reg Order
Ameris Bancorp in Moultrie, Ga., may have figured out a way to keep growing even in the face of a regulatory order.
The $6.5 billion-asset company said Monday that it had formed a joint venture with US Premium Finance, capping a four-year quest to get into insurance-premium finance. At the same time, Ameris disclosed that it had been hit with a consent order that will hamstring acquisitions in the near term.
Ameris executives, in fact, admitted during a conference call to discuss the partnership that they wanted to buy US Premium outright, but those plans were delayed by the consent order, which is tied to Bank Secrecy Act compliance.
For Ameris, the goal now is to quickly address the BSA issues so it can take over the finance business when the order is lifted. That could happen as soon as mid-2017, said Edwin Hortman Jr., Ameris' president and CEO.
"We've wanted to be in this business for some time now and we feel we can grow it substantially," Hortman said. "This joint venture is financially better than any M&A deal I've seen in the past two years."
US Premium, the nation's sixth-biggest premium finance company, will add about $400 million of loans to Ameris' balance sheet and should boost earnings per share by 16 to 20 cents next year before adding up to 25 cents in 2018.
That contribution, combined with ongoing organic growth, should push earnings past $3 a share in 2018, said Dennis Zember Jr., Ameris' chief operating officer. "To be able to get into the business at this level, we're pretty excited," Zember said.
Premium-finance companies provide short-term, collateralized loans that are used to buy insurance, allowing borrowers to pay insurance costs incrementally. In a research report published last year, Colonnade Advisors, a Chicago investment banking and financial advisory firm, estimated that annual premium finance volume could be as high as $30 billion.
Ameris' agreement comes four months after Synovus Financial in Columbus, Ga., agreed to pay $30 million for another premium-finance provider, Entaire Global Cos. in Atlanta.
Ameris, an acquisitive company that had bought four banks since 2010, must first absorb costs tied to the consent order. Ameris plans to take a one-time charge equal to about 10 cents a share after taxes in the fourth quarter to pay expenses tied to compliance.
The company traced its BSA problems to the improper installation of software about more than three years ago. Though the bugs have been ironed out, the company is hiring a number of consultants to "back-test" its systems to ensure no suspicious or illegal transactions took place while the glitches existed, Hortman said.
"It's a process, but the good news is we're in control of the process," Hortman said.
The order limits Ameris' ability to open branches or buy banks and other businesses. So Ameris negotiated a deal with US Premium and its president, Bill Villari, approved by regulators, where the bank will buy a 4.99% stake in the finance firm and issue about 129,000 shares of stock to Villari.
Villari will also receive a $200,000 base salary, and Ameris will receive payment equal to a 2.15% annualized return on US Premium's average daily loan balance.
Ameris was attracted to the low levels of risk tied to premium finance in general and to US Premium in particular. Over the last two decades, credit losses at US Premium have averaged less than 0.05% of total loan volume annually.
The vast majority of US Premium's loans are 100% cash secured, Zember said. Adding them to Ameris' existing municipal lending book means that up to a fifth of the company's overall portfolio will be secured by cash or ultrasafe municipal authorities.
The deal's main downside is a lack deposits to support the loans.
Casey Whitman, an analyst at Sandler O'Neill, pointed out in a research note to clients Monday that the partnership would push Ameris' loan-to-deposit ratio close to 100%. Still, she projected that the deal, along with strong organic growth and possible tax reform, could push Ameris' 2018 earnings to $3.41 a share.
Funding issues, meanwhile, could eventually be addressed by buying a deposit-rich bank.
Ameris' executives said they plan to resume the hunt for acquisitions once the consent order is lifted. The first order of business will be acquiring US Premium. After that they raised the possibility of buying another bank.
M&A "is something we want to do," Hortman said.