Colony Bankcorp, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. Colony Bankcorp is a Georgia bank holding company whose subsidiary provides retail and commercial banking services, primarily in central, south and coastal Georgia. This unaudited report covers the quarter and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017. Unless noted otherwise, financial amounts below are in millions. Management stated interim results include normal recurring adjustments and are not necessarily indicative of full-year results.
Financial performance and position
- Q2 earnings: Net income was $3.07 million, up 26.1% from $2.43 million a year earlier. Diluted EPS was $0.36 versus $0.28. For the first half, net income was $6.26 million, up 37.5%, and diluted EPS was $0.72 versus $0.50.
- Revenue and margins: Q2 net interest income was $10.17 million, up 3.6%; first-half net interest income was $20.29 million, up 5.3%. GAAP net interest margin was 3.56% for Q2 and 3.55% for the first half, compared with 3.48% and 3.41%, respectively, in 2017. First-half noninterest income was $4.76 million, down 0.8%.
- Expenses and credit costs: First-half noninterest expense rose 0.6% to $17.14 million. Provision for loan losses was $70,000, down from $335,000 in the first half of 2017; net charge-offs were $419,000 versus $1.22 million.
- Assets, loans and deposits: Total assets were $1.204 billion, down from $1.233 billion at year-end. Gross loans were $766.8 million, nearly unchanged from $765.3 million; deposits fell to $1.036 billion from $1.068 billion. Real-estate-secured loans represented approximately 87% of the portfolio.
- Credit quality: Nonperforming assets declined to $9.23 million from $11.76 million at year-end; nonperforming loans were 0.73% of loans, versus 0.98%. The allowance was $7.16 million, or 0.93% of loans, compared with $7.51 million, or 0.98%, at year-end. There were no loans accruing while 90 or more days past due.
- Cash flow and liquidity: Cash and cash equivalents ended at $9.90 million, down $13.25 million from year-end. First-half operating cash flow was $7.91 million, investing cash flow was positive $8.95 million and financing cash flow was negative $30.11 million. The report cites $250.6 million of remaining FHLB borrowing capacity and $43.5 million of unused federal funds lines; management said available funding sources were adequate.
- Debt and capital: Borrowed money totaled $77.74 million, including $53.51 million of other borrowings and $24.23 million of subordinated debentures. Consolidated total capital to risk-weighted assets was 15.74%, Tier 1 capital 14.81%, common equity Tier 1 12.02% and Tier 1 leverage 10.17%. Stockholders’ equity was $88.25 million, down from $90.32 million, with accumulated other comprehensive loss widening to $10.81 million from $6.49 million.
Material changes versus comparable periods
- First-half earnings improved on higher net interest income and lower provision expense; the effective income-tax burden also declined versus 2017.
- Net interest margin improved year over year. Management attributed higher net interest income to growth and improved yields on loans and securities, partly offset by increased deposit costs.
- Nonperforming assets continued to decline, and first-half net charge-offs were lower than in 2017.
- Deposits declined from year-end while other borrowed money increased. The company repurchased and cancelled its outstanding warrants for $3.2 million in June; this contributed to the financing cash outflow.
- Available-for-sale securities fell to $331.9 million from $354.2 million. Their accumulated unrealized losses increased, primarily reflecting higher market interest rates; management did not consider the declines other-than-temporary.
Outlook, risks and notable items
- Management’s 2018 priorities were to improve earnings, reduce problem assets, preserve strong capital and consider product and market expansion. It expected net interest margin to remain relatively flat for 2018 and anticipated two additional Federal Reserve rate increases during the year.
- Interest-rate modeling projected next-12-month net interest income changes of negative 0.27% for a 100-basis-point increase, negative 0.94% for a 200-basis-point increase and negative 0.92% for a 100-basis-point decrease. The filing also notes the sensitivity depends on deposit repricing and customer behavior. EVE modeling projected an 8.54% decline under an immediate 100-basis-point rate decrease, within the stated 10% policy limit.
- Key risks include local economic conditions, interest-rate changes, real-estate and geographic loan concentrations, collateral valuations, deposit competition, regulatory and accounting changes, technology and cyber risks, and litigation. Management warned that estimates for the loan-loss allowance and foreclosed real estate are inherently subjective. It reported no material change in risk factors from the 2017 Form 10-K.
- Subsequent events: On July 27, the Bank agreed to acquire a Planters First Bank branch in Albany, including approximately $10 million in deposits at a $560,000 premium and $20 million in loans at a $117,000 discount, and to buy a vacant lot for $725,000. Closing was expected in Q4 2018, subject to approvals and customary conditions. On July 30, the company announced CEO Edward P. Loomis Jr.’s retirement effective September 18 and named T. Heath Fountain as successor.
- The company paid common dividends of $0.05 per share in each of Q1 and Q2 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Legal proceedings were not expected to have a material adverse effect, according to management.
Important facts for investors to verify
- Whether deposit outflows continue and how the company funds loan growth, including use of FHLB advances, brokered deposits and other wholesale sources.
- Whether loan quality continues to improve, and whether the 0.93% allowance remains adequate given the 87% real-estate loan concentration and the sensitivity of collateral values.
- How rising rates, deposit pricing and customer deposit migration affect net interest margin and realized interest-rate exposure.
- The terms, regulatory approval and closing results of the Albany branch acquisition, and execution of the CEO transition.
- The effect of unrealized securities losses on equity and the company’s ability to maintain capital, liquidity and dividends.