ABCB - Ameris Bancorp: Attractively Valued But Earnings Likely To Dip

Summary

• The robust pipelines of unfunded commitments and job markets will likely sustain loan growth.
• The margin is moderately rate-sensitive thanks to sticky deposit costs.
• High inflation will likely reverse the credit quality, leading to higher provisions.
• The December 2022 target price suggests a high upside on the current market price. Further, ABCB is offering a low dividend yield.

Earnings of Ameris Bancorp ( ABCB ) will most probably plunge this year due to the normalization of both provisions and mortgage banking income. On the other hand, the top line will benefit from a rising rate environment. Further, moderately high loan growth will likely support the bottom line. Overall, I'm expecting Ameris Bancorp to report earnings of $5.0 per share for 2022, down 7.5% year-over-year. Compared to my last report on the company, I've increased my earnings estimate because I've revised upward both the loan growth and margin estimates. For 2023, I'm expecting earnings to increase by 3.7% to $5.19 per share. The year-end target price suggests a high upside from the current market price. Therefore, I'm maintaining a buy rating on Ameris Bancorp.

Strong Job Markets to Keep Loan Growth from Slowing Down too Much

Like many peer banks, Ameris Bancorp's loan growth during the second quarter of 2022 was exceptionally high. The portfolio grew by 8.8% during the quarter, or 35% annualized, which is the highest loan growth in a quarter since the second quarter of 2020. The management mentioned in the latest conference call that the high growth was attributable to borrowers pulling their borrowing requirements to an earlier time so as to lock in rates before they increase too much. This was especially true in the mortgage segment wherein people planning to buy homes over the next few quarters decided to enter into mortgage agreements during the second quarter only to avoid future higher interest rates. Such preemptive borrowing will make loan growth significantly slow down in future quarters.

Nevertheless, the management was optimistic about loan growth because of heightened commitments that are still unfunded, as mentioned in the conference call. Further, some economic factors will sustain loan growth. Ameris Bancorp serves businesses and individuals across the southeastern United States. Further, the loan portfolio is well diversified across segments ranging from commercial loans to residential mortgages. Therefore, broad-based economic metrics are appropriate gauges of Ameris Bancorp's product demand. The unemployment rate continues to remain near record lows, which bodes well for loan growth.

Further, the nation's consumer confidence improved for a second consecutive month after plummeting earlier this year. The turnaround in the trend is good news for both consumer and commercial loans as it affects consumer spending.

Considering these factors, I'm expecting the portfolio to grow by 2% every quarter till the end of 2023. This will lead to loan growth of 15% for 2022. In my last report on Ameris Bancorp, I estimated loan growth of 10% for 2022. I've increased my loan growth estimate mostly because of the second quarter's outstanding performance. Meanwhile, I'm expecting other balance sheet items to grow mostly in line with loans. The following table shows my balance sheet estimates.

In my last report on Ameris Bancorp, I estimated earnings of $4.72 per share for 2022. I've increased my earnings estimate mostly because I've revised upwards both my loan growth and margin estimates.

Actual earnings may differ materially from estimates because of the risks and uncertainties related to inflation, and consequently the timing and magnitude of interest rate hikes. Further, a stronger or longer-than-anticipated recession can increase the provisioning for expected loan losses beyond my estimates.

Maintaining a Buy Rating

Ameris Bancorp has maintained its dividend at $0.15 per share since the third quarter of 2019. Given the earnings outlook, I don't think the company will increase its dividend next year. The earnings estimate of $5.19 per share and the quarterly dividend estimate of $0.15 per share suggest a payout ratio of 11.6% for 2023, which is close to the five-year average of 15.9%. My dividend estimate implies a forward dividend yield of 1.2%.

I'm using the historical price-to-tangible book ("P/TB") and price-to-earnings ("P/E") multiples to value Ameris Bancorp. The stock has traded at an average P/TB ratio of 1.78 in the past, as shown below.

The stock has traded at an average P/E ratio of around 12.2x in the past, as shown below.

Equally weighting the target prices from the two valuation methods gives a combined target price of $56.3 , which implies a 15.2% upside from the current market price. Adding the forward dividend yield gives a total expected return of 16.4%. As a result, I'm maintaining a buy rating on Ameris Bancorp.

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