Ameris Bancorp 2020 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Ameris Bancorp is an Atlanta-based financial holding company operating primarily through Ameris Bank, which had 170 branches across Georgia, Alabama, Florida and South Carolina at June 30, 2020. The filing covers the three and six months ended June 30, 2020. The interim financial statements are unaudited.
Results include the July 1, 2019 acquisition of Fidelity Southern Corporation and reflect the effects of the COVID-19 pandemic, the Paycheck Protection Program (PPP), and adoption of the current expected credit loss (CECL) model on January 1, 2020.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net interest income | $163.8 million | $101.7 million | $311.8 million | $201.0 million |
| Provision for credit losses | $88.2 million | $4.7 million | $129.2 million | $8.1 million |
| Noninterest income | $121.0 million | $35.2 million | $175.3 million | $66.0 million |
| Noninterest expense | $155.8 million | $81.3 million | $293.8 million | $156.7 million |
| Net income | $32.2 million | $38.9 million | $51.6 million | $78.8 million |
| Diluted earnings per share | $0.47 | $0.82 | $0.74 | $1.66 |
| Tax-equivalent net interest margin | 3.83% | 3.91% | 3.77% | 3.93% |
| Return on average assets | 0.67% | 1.34% | 0.56% | 1.38% |
| Return on average common equity | 5.23% | 10.27% | 4.17% | 10.60% |
Mortgage-related activity was the primary source of noninterest income growth. Q2 mortgage banking income increased to $104.9 million from $18.5 million, while six-month mortgage banking income increased to $140.3 million from $33.2 million.
At June 30, 2020, total assets were $19.87 billion, compared with $18.24 billion at December 31, 2019. Loans were $14.50 billion, up from $12.82 billion, and loans held for sale were $1.74 billion, up from $1.66 billion. Total deposits were $15.59 billion, up from $14.03 billion. Shareholders’ equity was $2.46 billion, compared with $2.47 billion at year-end.
Cash and cash equivalents totaled $721.5 million at June 30, 2020, compared with $621.8 million at December 31, 2019. Six-month operating cash flow was negative $26.3 million, investing cash flow was negative $1.42 billion, and financing cash flow was positive $1.54 billion. Financing inflows primarily reflected a $1.56 billion increase in deposits and net borrowing activity.
Other borrowings were $1.42 billion at quarter-end. The Bank reported $2.83 billion of available borrowing capacity from the Federal Home Loan Bank and $1.43 billion available through the Federal Reserve discount window. Management stated that liquidity ratios were satisfactory and that it was aware of no events or trends likely to cause a material change in liquidity.
The Bank was considered well capitalized under all regulatory capital measurements. At June 30, 2020, the consolidated Tier 1 leverage ratio was 8.20%, CET1 ratio was 9.84%, and total capital ratio was 13.25%; the Bank’s corresponding ratios were 9.54%, 11.44%, and 12.76%.
Material Changes Versus Comparable Periods
- Net interest income increased substantially because of the Fidelity acquisition, loan growth, PPP lending and strong mortgage production. Average interest-earning assets increased 64.4% year over year in Q2, while the net interest margin declined eight basis points to 3.83%.
- Credit costs increased sharply. Q2 provision for credit losses was $88.2 million, including $68.4 million for loans and $19.7 million for unfunded commitments. The six-month provision was $129.2 million.
- The allowance for credit losses on loans increased to $208.8 million, or 1.44% of loans, from $38.2 million, or 0.30%, at December 31, 2019. CECL adoption increased the loan allowance by $78.7 million and reduced retained earnings by $56.7 million net of tax effects.
- Mortgage production increased to $2.67 billion in Q2 and $4.03 billion for the first six months, compared with $585.1 million and $941.1 million, respectively, in the comparable 2019 periods. The mortgage pipeline ended the quarter at $2.67 billion.
- Noninterest expense increased primarily from Fidelity-related staffing and branch costs, higher mortgage commissions, increased FDIC insurance and professional fees. Full-time equivalent employees increased to 2,645 from 1,777 at June 30, 2019.
- Nonperforming assets increased to $117.8 million, or 0.59% of total assets, from $101.3 million, or 0.56%, at December 31, 2019. Nonaccrual loans were $77.7 million, and accruing loans 90 days or more past due were $15.1 million.
- Loans modified for COVID-19-related short-term deferrals totaled approximately $2.76 billion, or 19.0% of total loans, at June 30, 2020. Approximately $1.1 billion of PPP loans were outstanding.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management stated that the full impact of COVID-19 was difficult to predict and depends on the duration and severity of the pandemic, economic reopening, unemployment, government actions and other developments.
Management identified COVID-19 as a material risk to loan performance, collateral values, liquidity, net interest margin, income and capital. Commercial real estate represented approximately 33% of total loans, including $1.64 billion of construction and development loans and $2.82 billion of nonfarm, nonresidential loans excluding owner-occupied properties.
Q2 and year-to-date results included material unusual items, including mortgage servicing rights impairment of $8.2 million and $29.0 million, respectively; SEC and DOJ investigation expenses of $1.3 million and $2.7 million; restructuring charges of approximately $1.5 million; COVID-19-related expenses of $2.0 million and $2.6 million; and merger and conversion charges of $895,000 and $1.4 million. Management also recorded an $845,000 gain on bank-owned life insurance proceeds.
Adjusted net income was $42.4 million, or $0.61 per diluted share, in Q2 2020, compared with reported net income of $32.2 million, or $0.47 per diluted share. For the six months, adjusted net income was $81.6 million, or $1.18 per diluted share, compared with reported net income of $51.6 million, or $0.74 per diluted share.
Goodwill impairment testing was triggered by the decline in the share price, COVID-19 and the low-rate environment. Quantitative testing as of May 31, 2020 indicated fair value above carrying value for both reporting units, and no goodwill impairment was recorded. The filing notes that the valuation is sensitive to growth rates, discount rates, market multiples and other assumptions.
The company disclosed an ongoing material weakness in internal control over financial reporting related to general ledger reconciliations following the Fidelity core-platform conversion. Disclosure controls and procedures were therefore deemed ineffective as of June 30, 2020. Remediation includes additional training, more detailed procedures, additional accounting personnel and review of system interfaces.
Legal proceedings, regulatory examinations, inquiries and investigations arise in the ordinary course. Management did not currently expect a material adverse effect from these matters, but acknowledged that an ultimate resolution could materially affect a particular period.
Most Important Facts for Investors to Verify
- Whether the $2.76 billion of COVID-19 loan deferrals convert into delinquencies, nonaccrual loans, charge-offs or additional CECL provisions after deferral periods expire.
- The sustainability of unusually strong mortgage banking production, gain-on-sale margins and the $2.67 billion mortgage pipeline.
- The adequacy of the $208.8 million loan allowance under alternative unemployment, GDP, real estate and commercial real estate scenarios.
- Progress in remediating the material weakness in financial reporting controls and whether subsequent filings report effective controls.
- The status and potential financial impact of the SEC and DOJ investigation expenses disclosed in the quarter.
- Changes in nonperforming assets, commercial real estate concentrations, collateral values and net charge-offs.
- Liquidity availability, reliance on short-term FHLB borrowings, deposit trends and compliance with well-capitalized requirements.
- Potential goodwill or mortgage servicing rights impairment if economic conditions, interest rates, prepayment speeds or the company’s share price deteriorate.